IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

__________________________________________

:

ROBERT WILLIAM HAROLD, Administrator : 

of the Estate of ROBERT GEORGE HAROLD : CIVIL ACTION

:

plaintiff, : No. 05-1493 ABB

:

vs. : JURY TRIAL DEMANDED

:

BRYAN A. McGANN, Individually, :

PILL POCKETS, INC., and S & M NuTec, LLC :

:

defendants. :

__________________________________________:

PLAINTIFF’S CONSOLIDATED OPPOSITION 

TO DEFENDANTS’ MOTIONS TO DISMISS

Although represented by the same counsel, Defendants Bryan McGann and Pill Pockets,

Inc. and Defendant S&M Nu Tec have filed separate motions to dismiss. To conserve the

Court’s resources, and avoid duplication of efforts, Plaintiff files one consolidated opposition to

Defendants’ Motions. For the reasons set forth in the accompanying Memorandum of Law,

Plaintiff respectfully requests that this Honorable Court deny Defendants’ Motions to Dismiss.

Respectfully submitted,

 

NEIL E. JOKELSON, ESQUIRE

DAVID E. JOKELSON, ESQUIRE

DEREK E. JOKELSON, ESQUIRE

Neil E. Jokelson & Associates, P.C.

230 South Broad Street, 18th Floor

Philadelphia, PA 19102

(215) 735-7556

Counsel for Plaintiffs 

IN THE UNITED STATES DISTRICT COURT

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 1 of 75
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

__________________________________________

:

ROBERT WILLIAM HAROLD, Administrator : 

of the Estate of ROBERT GEORGE HAROLD : CIVIL ACTION

:

plaintiff, : No. 05-1493 ABB

:

vs. : JURY TRIAL DEMANDED

:

BRYAN A. McGANN, Individually, :

PILL POCKETS, INC., and S & M NuTec, LLC :

:

defendants. :

__________________________________________:

MEMORANDUM OF LAW SUPPORTING

PLAINTIFF’S CONSOLIDATED OPPOSITION 

TO DEFENDANTS’ MOTIONS TO DISMISS

For the reasons set forth below, Defendants’ Motions to Dismiss should be denied. To

conserve the Court’s resources, and avoid duplication of efforts, Plaintiff files this one legal

memoranda.

1. Standard of Review

“Rule 12(b)(6) [] is designed to screen out cases where ‘a complaint states a claim based

upon a wrong for which there is clearly no remedy, or a claim which the plaintiff is without right

or power to assert and for which no relief could possibly be granted . . ..’” Port Auth. v.

Arcadian Corp, 189 F.3d 305, 312 (3d Cir. 1999). When reviewing a request for dismissal for

failure to state a claim upon which relief can be granted, the district court must accept as

“admitted and proved” “all facts contained in the complaint and every inference fairly deducible

therefrom, taking into consideration any factual information the Court can take judicial notice of,

. . . viewing the same in the light most favorable to the plaintiff.” Melo-Sonics Corp. v. Cropp,

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 2 of 75
2

342 F.2d 856, 858 (3d Cir. 1965). This includes facts alleged on information and belief. Id. at

859. Upon accepting as admitted and proven all allegations of record, dismissal may not be had

“no matter how likely it may seem that the pleader will be unable to prove his case” “unless it

appears to a certainty that the plaintiff would not be entitled to relief under any state of facts

which could be proved in support of his claim.” Id. at 858. Accordingly, “courts strongly

disfavor Rule 12(b)(6) motions.” Jackson v. Baddick, 2004 U.S. Dist. LEXIS 15154. *16

(E.D.Pa. 2004). Genentech has not met this burden.

Moreover, “Federal Rule of Civil Procedure 8(a)(2) ... provides that a complaint must

include only a short and plain statement of the claim showing that the pleader is entitled to relief.

Such a statement must simply give the defendant fair notice of what the plaintiff’s claim is and

the grounds upon which it rests.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (U.S., 2002)

(citing Conley v. Gibson, 355 U.S. 41 (1957)). 

“The prima facie case [concept] is an evidentiary standard, not a pleading requirement.”

Swierkiewicz, 534 U.S. at 510. Hence,”[t]his simplified notice pleading standard relies on

liberal discovery rules and summary judgment motions to define disputed facts and issues and to

dispose of unmeritorious claims.” Swierkiewicz, 534 U.S. at 512. 

“These requirements are exemplified by the Federal Rules of Civil Procedure Forms,

which ‘are sufficient under the rules and are intended to indicate the simplicity and brevity of

statement which the rules contemplate.’ Fed. Rule Civ. Proc. 84.” Swierkiewicz, 534 U.S. at

513. “For example, Form 9 sets forth a complaint for negligence in which plaintiff simply states

in relevant part: ‘On June 1, 1936, in a public highway called Boylston Street in Boston,

Massachusetts, defendant negligently drove a motor vehicle against plaintiff who was then

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 3 of 75
3

crossing said highway.’” Id.

 “Given the Federal Rules’s simplified standard for pleading, ‘[a] court may dismiss a

complaint only if it is clear that no relief could be granted under any set of facts that could be

proved consistent with the allegations.’” Swierkiewicz, supra, quoting Conley, supra.

As for fraud, Federal Rule of Civil Procedure 9(b) provides that “[i]n all averments of

fraud or mistake, the circumstances constituting fraud or mistake shall be stated with

particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred

generally.” While allegations reciting the date, place or time when the fraud occurred are

usually sufficient to satisfy Rule 9(b), “nothing in the rule requires them.” Seville Indus. Mach.

Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984). Accordingly, a plaintiff may

use alternative means to inject precision and some measure of substantiation in their allegations

of fraud. Id.

The Third Circuit has cautioned that “focusing exclusively on [Rule 9(b)’s] particularity

language ‘is too narrow an approach and fails to take account of the general simplicity and

flexibility contemplated by the rules.’” Christidis v. First Pa. Mortgage Trust, 717 F.2d 96, 100

(3d Cir. 1983) (quoting 5 C. Wright & A. Miller, Federal Practice and Procedure § 1298, at 407

(1969)). The Third Circuit also directs district courts to “be sensitive to the fact that [harsh

application of the Rule] . . . may permit sophisticated defrauders to successfully conceal the

details of their fraud.” Christidis v. First Penn. Mortgage Trust, 717 F.2d 96, 99-100 (3d Cir.

1983); accord Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284 (3d Cir., 1992). Particularly in cases

of corporate fraud, plaintiffs cannot be expected to have personal knowledge of the details of

corporate internal affairs. Craftmatic Sec. Litigation v. Kraftsow, 890 F.2d 628, 645 (3d Cir.,

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 4 of 75
1

Defendants have attached two documents from outside the record. To complete alleged

facts presented in those documents, Plaintiff attaches further correspondence as well as redacted

transactional documents and a Trust Report which have been produced in early discovery. These

latter documents are presently before the Court as Exhibits to Plaintiff’s Motion to Compel.

4

1989). Finally, in Pennsylvania, where a confidential relationship between the parties exists and

“the party in whom the confidence is reposed obtains an apparent advantage over the other, he

[or she] is presumed to have obtained that advantage fraudulently.” Matter of Estate of Evasew,

526 Pa. 98, 584 A.2d 910, 912-13 (Pa. 1990).

2. Statement of Facts1

Accepting all facts in the complaint and all reasonable inferences therefrom as admitted

and proven, and viewing same in the light most favorable to Plaintiff, the record reveals the

following.

On August 15, 1989, the United States Patent Office issued Patent No. 4,857,333 (“the

Patent”) to Plaintiff’s decedent, Robert George Harold, for his invention for “FOOD PRODUCT

FOR ADMINISTERING MEDICATION TO ANIMALS.” ¶ 1. The Patent covered the

invention of a “formed, chewable food treat with at least one pre-formed pocket therein opening

to an outer surface of the treat and sized to retain a medicant therein.” Cmplt. Exh. A. 

In April 1997, Defendant Bryan McGann approached Mr. Harold to purchase the Patent. 

Mr. McGann initiated this solicitation of Mr. Harold, whom he came to understand at or around

this time was, with his wife Dorothy Harold, “having tough days” and that both Mr. and Mrs.

Harold were in “pain.” ¶14 & 16. Cmplt. Exh. D. As a result of their discussions, on May 15,

1997, Mr. McGann forwarded to Mr. Harold a cover letter enclosing a Letter Agreement for his

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 5 of 75
2

As further consideration, the parties agreed that in the event the patent were infringed

and a settlement were achieved, then “Bryan McGann, or the then owner of the patent, will pay

to Bob Harold 5% of the net settlement amount (less costs, attorney fees etc.) up to $100,000.00.

5

counter signature to effect a sale and assignment of the Patent, a check for $500.00 and a

document styled Assignment of U.S. Patent. ¶16. Cmplt. Exh. B. As Mr. McGann explained in

his cover letter, “[m]y attorney said that the letter format I had was fine for our purposes as long

as it is backed up by the formal assignment and sale agreement for recording in the patent

office.” Cmplt Exh. B.

The purchase price stated in the Letter Agreement included an unconditional payment of

$500.00 by the check accompanying the Letter Agreement as well as the promise to pay a 5%

royalty on net sales of products covered by the patent as follows:

Bryan McGann will pay to Bob Harold a royalty of 5% on net sales of

products covered by the claims of the patent, up to a total cap of $100,000.00 in

cumulative royalty payments. This royalty cap represents cumulative net sales

of $2,000,000.00. Bryan McGann will report semi-annually to Bob Harold on

the net sales of the product covered by this patent.2

Id. (Emphasis supplied). Moreover, as Mr. McGann explained in his cover letter, in the event

the Patent were sold to another party, the “[Letter] [A]greement [would] survive[] any sale and

will be the responsibility of any future owner of the patent.” Id. To effect this intent, Mr.

McGann worded the Letter Agreement to state “simply” that:

If the patent is sold to another party, this agreement will survive the sale as a

contingent payment obligation provided that the total payments to Bob Harold

have not exceeded the $100,000.00 royalty cap. 

Id.

Mr. Harold signed the Letter Agreement on May 19, 1997. (The Harold Letter

Agreement is hereafter referred to as the “HLA”). ¶17. That same day, he also executed the

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 6 of 75
3

While PPI and McGann disbursed $1000.00 and $500 to Mrs. Harold in January and

September 2004, respectively, neither of these payments were on account of royalties due on net

sales. Instead, as detailed below, these payments were purposely mis-characterized to conceal

the fact that products covered by the Patent were generating significant net sales. No other

payments have been made to Mr. Harold or the estate or his heirs, nor have any royalty payments

been made on account of net sales which exceed $800,000.00. 

6

Assignment of U.S. Patent assigning his “entire right, title and interest in and to said invention

and Letters Patent” to Mr. McGann. Cmplt. Exh. B.

As detailed below, both Mr. McGann and Pill Pockets, Inc. (“PPI”), the corporation

formed by Mr. McGann to become the successor-in-interest to the Patent, have defrauded Mr.

Harold and his heirs and entirely failed to perform under the terms of the HLA, with the sole

exception being the initial $500.00 payment made to induce Mr. Harold to sell and assign his

invention and valuable patent rights.3

 While products covered by the Patent have generated net

sales in excess of $835,000 through December 31, 2004 (upon which royalties should have

exceeded $41,000), the record reflects that neither Mr. McGann nor PPI have ever reported net

sales as required by the Letter Agreement, nor did they ever pay royalties on account of net

sales.

Instead, after neglecting the Patent until some time in 2002, Mr. McGann, both

individually and on behalf of PPI, continually reassured Mr. Harold and his heirs that he would

honor the HLA but represented that “no money was being made” and he “was not even taking a

salary” to create the false impression that products covered by the Patent were not generating

significant sales. Indeed, when making these or similar representations in writing, Mr. McGann

purposely identified himself as a Doctor of Jurisprudence to further engender the Harolds’ trust

and confidence. These misrepresentations and failures to account for net sales as required by the

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 7 of 75
4

This admission as well as other contentions in Defendants’ Motions to Dismiss assert

“facts” outside the record in an attempt to persuade the Court to dismiss Plaintiff’s Complaint. 

While Plaintiff is accepting of the limited admission, for the purpose of this motion, that monies

from net sales were used by Defendants “for the investment of seed capital to build and fund the

business,” many of the contentions are disputed, including allegations to the effect that:

• “McGann and Plaintiff agreed to convert the method of payment under the

Harold/McGann Contract from a royalty on sales to a royalty on dividends” McGann

Memorandum of Law at 6; and

• “royalties were placed in escrow for the benefit of the Harold estate.” Id.

To the extent this Court considers the substance of these disputed matters, Plaintiff requests

leave to amend the Complaint to allege, inter alia, facts demonstrating the Harolds’ lack of

education, sophistication and business acumen, including their lack of understanding of the

differences between terms used by Defendants including “royalties on dividends,” “royalties on

sales” and “royalt[y] on equity,” and that Defendants only placed any monies in the purported

escrow account after Plaintiff, through counsel, rescinded the HLA.

7

HLA were part of a conspiracy by and between McGann and PPI to convert Plaintiff’s property

(including the royalty payments already due and owing) to their own use. Indeed Defendants

now admit that the monies due the Harold’s from net sales were diverted and used by Defendants

“for the investment of seed capital to build and fund the business.” McGann Memorandum of

Law at 6.4 This business “buil[t] and fund[ed]” with the Harolds’ funds has now been sold by

Defendants McGann and PPI to Defendant S&M NuTec for more than four million dollars.

 Both before and on May 15, 1997, Defendant McGann represented to Mr. Harold,

expressly and/or impliedly, that he would produce and market a product covered by the Patent

and that he would do so in a prompt and commercially reasonable fashion to generate sales. 

¶21&23. In this regard, Mr. McGann provided in the Letter Agreement that “[i]n the event of

unforeseen delays in the generation of sales, Bob Harold can exchange his royalty options for

cash equal to $3,000.00.” Exh. B. (Emphasis supplied). Towards that purpose to act promptly,

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 8 of 75
8

Messrs. Harold and McGann entered into a further agreement in August 1997, wherein Mr.

Harold assigned to Mr. McGann any rights that he held to the potential trade name

“STOWAWAY” together with art work and a copyright thereto pertaining to original art work to

market the product as had been developed by or on behalf of Mr. Harold. Cmplt. Exh. C.

Unbeknownst to Mr. Harold, in or around 1998 Mr. McGann, instead of marketing and

producing the product as contemplated by the HLA, enrolled in and attended law school at the

University of North Carolina at Chapel Hill where he subsequently obtained his law degree. 

¶26. Upon information and belief, Mr. McGann did not communicate at any time with Mr.

Harold from in or about the middle of 1998 until on or about March 14, 2002 when he wrote to

Mr. and Mrs. Harold:

I know this letter must find you quite surprised since it has been so long.

Given the twists and turns over the last few years, I am a little surprised to have

the opportunity to write you with possible good news. In 1998 I returned to

school and earned my law degree from the University of North Carolina at Chapel

Hill. I have never lost my desire to get Stow Away to market, but as time went by,

each opportunity seemed to have a catch that thwarted my efforts. On a more

positive note, I have a four year old that has kept my non-law school attention.

Now I am able to give you a different report. I am involved with an

individual in Colorado who obtained a patent in 2000 on different designs of Stow

Away. While she cannot make her product without violating the Harold patent,

she has the trademark on the name Pill Pockets which has received great praise in

consumer focus groups. She is also very well connected in many of the veterinary

circles and has given us the contacts we needed to move ahead full speed. In July

of this year, we will introduce the product at the AVMA Convention in Nashville.

We are displaying the product in an exhibitor booth and will hold a news

conference along with some of our veterinary consultants. In all, we hope to build

this effort quickly, and hope to entertain offers in the near future to purchase the

product. Either way, however, we have received a great deal of support and

enthusiastic cooperation as we have worked to get to this point. I will keep you

informed of all events as they unfold. 

I hope this letter finds you well. I know that you were having tough days

back in 1997 and 1998 and I pray that you have found relief form the pain you

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 9 of 75
9

described. I look forward to talking with you soon. Take good care.

¶26 and Cmplt. Exh. D. By stating in the March 14, 2002 letter that “I will keep you informed of

all events as they unfold,” Mr. McGann hoped to gain the further support, trust and confidence

of Mr. and Mrs. Harold. ¶28. To further engender trust and confidence, Mr. McGann identified

himself on the signature line as a Doctor of Jurisprudence and an MBA. Cmplt. Exh. D.

Mr. and Mrs. Harold responded by email dated July 13, 2002. The Harolds explained

that they were “thrilled to death as this was the first piece of good news in our life for a long

long time” and that they “had been under EXTREME stress for many months.” 

My wife’s mother started with alzheimers disease last year. She had been living

alone in her own home for the past 25 years and we would help her whenever she

needed it, Pay her bills, see to her medicines, doctors visits, etc. Over the past

several months her health deteriorated and we became nursing aides on a daily

basis. Finally we had to place her in a assisted living facility as it became

Overwhelming for us. Now my mother-in-law had no money except for her home

valued at 100K. All of a sudden out of the woodwork my in-laws (Dot’s brother

and sister-in-law) show up. They only came around once or twice a year to visit

even though they only lived 80 miles away. Now they have her sign over and sell

her home, get power of attorney and move her close to where they live.

We couldn’t contest anything as unfortunately I lost mostly all of my

retirement and savings over the past few years as three of my investment

companies went bankrupt. Along with all of this my step father is in a rehab

facility recovering from a stroke. Now my mother is by herself and wants me to

come see her more often as she is afraid to live alone. She lives seventy miles

away in New Jersey. Well as you might have guessed my migraines are much

worse causing me to seek medical attention weekly. (Narcotic injections)

Unfortunately none of the new migraine medications help me...Now I’m really

sure you understand how happy Dot and I were after hearing from you.

Cmplt. Exh. E. On September 29, 2002, Robert George Harold died. ¶30.

After Mr. Harold died, his son Robert William Harold called Mr. McGann to inform him

that Mr. Harold passed away. ¶31. Mr. McGann assured Robert William Harold that he would

honor the original HLA. ¶31. Shortly thereafter, Mr. McGann called Dorothy Harold, Mr.

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5

The PSPA was never shared with Plaintiff or any of the heirs to the estate at any relevant

time. A redacted form of this agreement was first produced on May 17, 2005 after the

Complaint was filed.

10

Harold’s widow, and again confirmed that he “would honor the contract” or words to that effect.

¶32. Mr. McGann, however, never intended to honor the terms of the HLA or the promises to

Robert William Harold and Dorothy Harold that he would honor the HLA. ¶33. Thereafter, for

the remainder of 2002 through early 2005, Robert William Harold would periodically call

McGann to ask for updates. At no point did Mr. McGann inform Robert William Harold of any

net sales of product. Instead, Defendant McGann told Robert William Harold on one or more

occasions that no money was being made and that Defendant McGann was not even taking a

salary. ¶37. 

In 2003, Mr. McGann incorporated Defendant Pill Pockets Inc. (PPI), naming himself as

President and Chief Executive Officer, and transferred ownership of the Patent to PPI. ¶34.

Unbeknownst to Plaintiff, however, Mr. McGann violated the HLA by transferring the Patent to

PPI without executing appropriate documents to ensure that the HLA survived the transfer as the

responsibility of PPI, as called for in the HLA. ¶35. This violation of the HLA, although

unknown to the Harolds, appears to be confirmed by PPI in a Preferred Stock Purchase

Agreement (“PSPA”) it entered on February 19, 2003. Exh. A.5

 The “DISCLOSURE

SCHEDULE” attached as Exhibit D to the PSPA memorializes that Mr. McGann was to

“remain[] responsible for the payment” owed under the HLA “and for the reporting requirements

detailed in the letter of agreement.” 

Moreover, the drafter(s) of the PSPA, to which PPI and presumably Mr. McGann were

parties, blatantly misrepresented the terms of the HLA. While the HLA expressly provided that

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 11 of 75
11

its terms would survive any sale of the Patent and that any future owner of the Patent would

remain “responsible” for complying with those terms, including the obligation to pay a royalty of

5% of the net sales, the PSPA appears to reflect a decision by PPI and McGann to distort the

meaning of these terms. Under this purposeful distortion by the Defendants, the Estate of Robert

Harold would lose its entitlement to 5% of all net sales, and instead be limited to 5% of any

dividends or proceeds PPI chose to disburse to Mr. McGann, thereby enabling PPI, by electing

not to pay “dividends” or “proceeds” to Mr. McGann, to unilaterally and at the expense of

Plaintiff funnel all net sales revenues back into the business to grow and expand same. 

Moreover, the Harolds would no longer be creditors, but instead would have a subordinated

“equity” position. Paragraph 1 of the Disclosure Schedule provides in relevant part as follows: 

Agreement with Robert Harold. Pursuant to the terms of the attached letter

agreement, partial compensation for the purchase of the Harold patent included

various provisions to pay Harold either 5% of net sales of the product if sold

directly by McGann, or participate in 5% of any proceeds received by McGann in

the event of sale, assignment or infringement of the patent up to a cumulative cap

of $100,000. Pursuant to bullet point five in the letter agreement, if the patent is

sold or assigned to another party, McGann’s obligation survives and payments

would be paid from any dividends or proceeds received by McGann. McGann

remains responsible for the payment of this amount and for the reporting

requirements detailed in the letter of agreement. Though Harold has since passed

away, McGann will make payment directly to his spouse.

This statement does not accurately describe the terms of the HLA which clearly provide that

royalties will always be paid by the patent’s owner on net sales, not on dividends which a

corporation such as PPI could choose not to pay out. Neither PPI nor Mr. McGann expressly

informed the Harolds of this unilateral change. Indeed, Mr. McGann, in what appears to be a

part of his continuing acts of deception, expressly assured the Harolds as late at March 3, 2005

that “the current agreement between us calls for payment on sales of product.” Cmplt Exh. H.

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In the second six months of 2003, net sales of products covered by the Patent exceeded 

$35,000. ¶38. Pursuant to the terms of the HLA, the royalty due the Plaintiff on those net sales

would exceed $1,800. ¶38. Mr. McGann and PPI, however, did not report these net sales figures

or make payment of the royalty on account of those net sales as called for in the HLA. ¶38-39.

Instead, Mr. McGann, signing as “JD” for Doctor of Jurisprudence on PPI letterhead, wrote to

Dorothy Harold on January 15, 2004 and enclosed a check made payable to her for $1,000.00.

¶39. This payment, however, was not made on account of the 5% royalty on net sales per the

terms of the contract, but, according to McGann and PPI, represented “5% of the proceeds

received in the merger with the Colorado company.” ¶40 and Cmplt. Exh. F. To further

engender the Harolds’ confidence, trust and support as part of his scheme to defraud them, Mr.

McGann promised to increase his reports to quarterly from semi-annually.

I hope this letter finds you well. Much has happened since we last spoke

on the phone and I wanted to give you an update on the progress that Pill Pockets

is making. Last year we merged with an investment group out of Colorado in

exchange for a contribution of capital. This allowed us to build a plant in North

Carolina in which we manufacture and distribute the product. So far, we have

accomplished that task and we are now beginning to promote and actively market

Pill Pockets for both dogs and cats. This changed my ownership of the Harold

patents, but as I had agreed to do with Mr. Harold back in 1997, the agreement

between us remains my personal obligation. I am happy to send you that portion

of any dividends or equity I receive up to the stated maximum, and I must tell

you, I believe we will reach that maximum!

I am enclosing your first check for $1,000 that represents 5% of the

proceeds received in the merger with the Colorado company. I spoke with

you son recently and told him that I will also be reporting to you on a quarterly

basis instead of twice of year as called for in the agreement. This will keep

you better informed of the happenings of the company. 

I have enclosed samples of our product. I am truly excited about the

possibilities we have to make this effort successful. I look forward to writing

again soon.

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 13 of 75
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Cmplt. Exh. F. Neither Mr. McGann nor PPI, however, made the quarterly reports promised in

the January 15, 2004 letter or reported semi-annually, or otherwise, on any net sales from May

1997 up until March 2005. ¶41. 

Net sales of products covered by the Patent exceeded $300,000 in the first six months of

2004 such that the royalties owed the Plaintiff would exceed $15,000 under the HLA. ¶43.

Again, instead of paying the royalty on net sales, Mr. McGann wrote to Mrs. Harold on

September 14, 2004, and offered a check for $500 as an “Advance on Royalty Payments.” ¶44

and Cmplt.Exh. G. (Emphasis supplied). Again, Mr. McGann wrote on PPI letterhead and

signed as a Doctor of Jurisprudence as well as a Ph.D.:

As you can see, we are nearing the point where we will be a profitable

company with a broad product line. Our cat Pill Pockets have quickly become our

best sellers since cat owners have no alternative other than stuffing the pill down

the cat’s throat. I am enclosing an email I received today from a cat owner who

has found Pill Pockets to be a life-saver. I am also enclosing a check for $500

for you. Even though I am not taking a salary and we have yet to reach

break-even, I believe that will change soon and I will regularly receive salary

and dividends and checks to you will become more regular. I apologize for not

writing sooner, I have been traveling for 6 months to all of these shows. We have

now hired a Vice President of Sales who will take over for a lot of this travel and

allow me to upgrade our administrative processes here at the home office. My

wife and I are expecting a son in December so she is forcing me to stay home

now!

Cmplt. Exh. G. (Emphasis supplied). In truth and in fact no “Advance” on royalty payments

needed to be made as Mr. McGann and PPI had already realized substantial sales which should

have generated royalty payments well in excess of the $500.00. ¶46. (Emphasis supplied). By

failing to properly account for the net sales, and by characterizing the payment as an “advance,”

Defendants McGann and PPI materially and deliberately misled the Harolds as part of their

continuing scheme to defraud and concealed from them material information which they had a

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 14 of 75
6

The parties defined “Net Assets” to mean all assets and liabilities of PPI except those

specifically excluded by the agreement of the parties. 

14

duty to disclose including, but not limited to, the fact that funds due were not being paid but

instead were being converted by Defendants McGann and PPI for their own use and benefit all in

violation of their fiduciary duty. ¶46.

In the second half of 2004, net sales on products covered by the Patent exceeded

$500,000.00 (upon which the royalty on net sales would exceed $25,000). ¶47. Again,

defendants failed to pay the Harolds the royalty thereon. ¶48.

On or about January 28, 2005, unknown to the Harolds at the time, PPI entered into a

“non binding letter of intent” with Defendant S&M NuTec contemplating the sale of

substantially all “Net Assets” of PPI, the major constituent part of which was the Patent

purchased by Mr. McGann from Robert George Harold pursuant to the HLA.6

 ¶51 and Cmplt.

Exh. H. This letter of intent contemplated a sale price of at least $4,100,000.00 with

$2,000,000.00 payable at closing to McGann/PPI and the balance payable over a two year period

along with royalty payments of 7% of net sales per calendar year through May of 2008 and the

greater of 6% of net sales or $250,000.00 per year thereafter through December 31, 2017. ¶52. 

As reflected in the cover letter from S&M NuTec, Inc., this offer was based upon S&M NuTec’s

review of the PPI’s “financials, pro form, and other information” which PPI “openly provided.” 

Cmplt. Exh. H. Further, each party “reserve[d] the right to conduct any remaining due diligence

they may deem necessary prior to closing of the transaction.” Id. 

In or about early March 2005, most likely March 2 or 3, 2005, Mr. McGann, persisting in

his scheme to defraud contacted Robert William Harold stating that he was close to selling the

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 15 of 75
15

Patent to S&M NuTec, Inc., and that in order to close the transaction, he needed some paperwork

signed, and that Dorothy Harold would get “the substantial amount of $14,630" after closing so

long as she signed off on some required paperwork by the weekend as closing was scheduled for

Monday March 7, 2005. ¶53. Mr. McGann (acting on his own behalf and on behalf of PPI)

deliberately concealed from the Harolds the fact that royalty payments then due the Harolds

exceeded $40,000 based upon net sales exceeding $800,000 through year end 2004 and created

the false impression that no such monies were owed and that the “the substantial amount of

$14,630" was somehow derived from the sale to S&M NuTec. ¶54. Such action was taken to

advance the civil conspiracy described in the complaint. ¶54.

Shortly thereafter, at 5:42 p.m on Thursday March 3, 2005, Mr. McGann faxed Robert

William Harold a letter following-up on their telephone conversation. ¶55. Again Mr. McGann

identified himself on his signature line as a Doctor of Jurisprudence as well as a Ph.D. and

President, Chairman and CEO of PPI, and attached to the letter the executed S&M NuTec Non

Binding Letter of Intent dated January 28, 2005 and the accompanying cover letter dated January

19, 2005, as well as a “new” Letter Agreement for Dorothy Harold to counter sign for the Estate

of Robert Harold. Cmplt. Exh. H. This proposed “new” Letter Agreement, however, along with

the cover letter were sent in an attempt to further McGann and PPI’s civil conspiracy and

defraud the Harolds from their just entitlements to royalties on net sales and to keep concealed

from them the defalcations, misappropriations and conversions of the royalty payments

previously due and owing to the Harolds as well as the breaches of fiduciary duties by McGann

and PPI. ¶57.

Under this “new” Letter Agreement drafted by Mr. McGann, the HLA would

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 16 of 75
7

To effect their fraudulent scheme and further abuse the relationship between the parties,

the proposed new agreement sent by defendants McGann and PPI on March 3, 2005 stated, inter

alia, as follows:

The parties hereto agree that, effective upon the Closing, (i) neither McGann nor

the Company [PPI], nor any third party (including the purchaser of the

Copmany’s business and the above-referenced patent) shall have any obligation

or liabilty under the Letter Agreement, (ii) the letter Agreement shall immediately

terminate and be of no further force or effect, (iii) each of Harold, McGann and

the Company releases and forever discharges each other party hereto and its

respective officers, directors, and agents from any and all lawsuits, liabilities,

actions, causes of action, claims, demands, damages, costs and debts of whatever

kind whatsoever, whether known or unknown, on account of or in any way

growing out of or in connection with the Letter Agreement or the subject matter

thereof, and (iv) Harold shall be entitled to receive consideration as provided in

Section 3 hereof.

Cmplt. Exh. H.

16

“immediately terminate” and the Harolds would lose all rights under the HLA, including the

right to collect royalties on net sales. Cmplt. Exh. H. Moreover, Mr. McGann provided that

Mrs. Harold “release[] and forever discharge[]” Mr. McGann, PPI and any successor-in-interest

to the Patent such as S&M NuTec from “any and all” liability, “whether known or unknown,

on account of or in any way growing out of or in connection with the [Harold] Letter

Agreement.”7

 Id. (Emphasis supplied). This proposed release was nothing short of a

surreptitious attempt by McGann and PPI to hold themselves harmless from their own continuing

conspiracy to defraud. Mr. McGann signed this “new” Letter Agreement and again identified

himself as a Doctor of Jurisprudence, as well as a Ph.D. and President and CEO of PPI. Id. 

While Mr. McGann acknowledged in his cover letter that “the current agreement between

us calls for payment on sales of product,” he suggested that Mrs. Harold counter-sign the “new”

Letter Agreement so that she could be “treat[ed] ... like a shareholder of our company.” Id. As a

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 17 of 75
8

This concealment is in contradistinction to the policy of “open[ness]” Mr. McGann and

PPI followed with S&M NuTec when they “openly provided” PPI’s “financials, pro forma and

other information.” Cmplt. Exh. H. 

9

That he was acting as a good Samaritan or otherwise a “starving artist” as he portrayed

himself, is belied by the fact that Mr. McGann has been employed as an associate practicing

“general corporate litigation matters” with the law firm of Smith, Anderson, Blount, Dorsett,

Mitchell & Jernigan, LLP, since “September 2001 upon graduation from” law school. Plaintiff

has recently discovered this matter from the web site of Smith, Anderson, as that was the law

firm identified as the preparer of the P.S.P.A. Smith, Anderson is the “largest law firm in

Raleigh and the Research Triangle region of North Carolina and one of the largest in the state”

of North Carolina “provid[ing] a full range of legal services ... [to] clients includ[ing] some of

the largest financial institutions, insurance companies, public utilities, retailers, manufacturing,

pharmaceutical, and biotechnology companies in our region and the nation, as well as emerging

growth and technology companies.” See Exh. B hereto, which Plaintiff’s counsel just

discovered. To the extent this Court finds these facts material to the disposition of the Motions

to Dismiss but cannot consider these documents, Plaintiff requests leave to replead the facts

contained in the documents. 

17

shareholder, Mr. McGann promised that “she would be paid next week” $14,630.00 after the

closing with S&M NuTec based upon the percentage of dividends to which she would be

entitled. Id. Mr. McGann, however, continued to conceal from the Harolds the fact that over

$40,000.00 in royalties were already due and owing and that PPI had generated over

$800,000.00 in net sales in 2004.8 Further, Mr. McGann’s letter postured McGann as a good

Samaritan by going above and beyond that which was required under the HLA: “Though I sent

her [Dorothy Harold] $1,500 over this period, it has actually gone the other way with my wife

and I contributing approximately $250,000 to the Company and a mortgage on our house to

secure the line of credit with our bank.”9

As we discussed by telephone I am faxing this letter along with some information

regarding the sale of the assets of Pill Pockets, Inc. to S&M NuTec, LLC makers

of Greenies brand dog treats. As you can see, the president of S&M NuTec made

a very persuasive case as to why we should hook our wagon to what they have

already built.

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 18 of 75
18

As for your mom and her part in the process, it is my intention with this new

agreement attached that she be able to take part in the payment stream for the full

13 years of the S&M NuTec agreement (if necessary), instead of her payments

terminating at the expiration of claims of the Harold patent in May of 2008. More

importantly, the current agreement between us calls for payment on sales of

product, while the attached, proposed agreement will treat her like a shareholder

of our company and pay her also on the closing process of the sale of Pill Pockets

as a company which includes other patents, equipment, and trademarks.

When I decided not to sell this product on my own and formed Pill Pockets with

the investors from Colorado, I told your mom that I would pay her 5% of any

dividends I received up to her maximum. Though I sent her $1,500 over this

period, it has actually gone the other way with my wife and I contributing

approximately $250,000 to the Company and a mortgage on our house to secure

the line of credit with our bank. What I have had the board of Pill Pockets

approve, is to take the agreement I have personally with your mom, and make it a

company obligation to be paid at each distribution of proceeds of the shareholders

of Pill Pockets. Since I control 41.84% of Pill Pockets, your mom’s 5% share of

my holdings translates into 2.09% of the total to the shareholders up to the cap of

$100,000.

Arguably, the wording of our original letter agreement would call for this

obligation to transfer to S&M NuTec since the Harold patent is one of the assets

being sold. I believe this may be irrelevant since this new agreement limits the

risk of less than a full payout since we have extended the period your mom could

be paid from 3 years to 13, as well as made her a part of the closing proceeds and

not just sales of product. For example, she will be paid 2.09% of the initial

distribution to shareholders which we anticipate will be $700,000. Your mom’s

share would therefore be $14,630 and would be paid next week. In addition to

this, without selling the first dollar of product, we have an addition $2 million to

be paid over the next two years for the assets of the company where, again, your

mom will receive 2.09% or $41,800. These payments are guaranteed by S&M

NuTec whether the company ever sells any product. Of course we know they

will, and the distributions to the shareholders will be made quarterly beginning

this summer. Your mom will be entitled to receive 2.09% of the amount of these

distributions as well until she reaches the full $100,000.

I would like to answer any questions you might have so I will call you later today

or tomorrow. We would like to get a signature prior to closing on Monday so we

don’t hold up any distributions or the sale itself. I know this is all happening

quickly, but we have had to treat this all as confidential.

Cmplt. Exh. H. 

From Thursday March 3, 2005 (when the proposed new agreement was faxed to Robert

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 19 of 75
10The Closing Documents were provided by Defense counsel to Plaintiff’s counsel on

May, 17, 2005. Despite demand that the referenced “Letter Agreement by and between Pill

Pockets, Inc. and Mrs. Robert G. Harold” be produced Defense Counsel refused. Exh. D. As no

such Letter Agreement was ever signed by Mrs. Robert G. Harold, if this Court believes that this

is material to the instant motion, leave to replead this fact is requested. 

19

William Harold for presentation to his mother Dorothy Harold) through Monday March 7, 2005,

Mr. McGann called the Harolds and left numerous messages in an attempt to pressure Mrs.

Harold to execute the new agreement prior to the closing scheduled for Monday March 7, 2005.

¶59. Mrs. Harold did not execute the proposed new agreement. ¶60. 

The transaction between PPI and S&M NuTec closed on March 7, 2005, presumably with

S&M NuTec having completed its due diligence. Mr. McGann and PPI received a minimum of

$2,000,000.00 at closing. ¶61. Mr. McGann and PPI, in apparent furtherance of their scheme to

defraud, failed to ensure that appropriate documents were executed to guarantee that the HLA

would survive the sale of the Patent to S&M NuTec as called for in the HLA. ¶62. This

violation was confirmed by the Closing Documents which provide that:

Letter Agreement by and between Pill Pockets, Inc. and Mrs. Robert G. Harold10

regarding Letter Agreement by and between Brian A. McGann and Mr. Robert G.

Harold. These agreements are Retained Liabilities and will not be assumed by

S&M Nutec.

Exh. C. Moreover, based upon the records PPI and McGann “openly provided” S&M NuTec, as

well as the right of S&M NuTec to conduct further due diligence under the Non Binding Letter

of Intent, S&M Nu-Tec knew, or should have known, through the exercise of appropriate due

diligence that Mr. McGann and PPI had abused their relationship with Plaintiff and were in

material breach of the HLA. ¶67. 

Although Mrs. Harold had affirmatively declined to participate in PPI’s activities as a

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 20 of 75
20

shareholder by refusing to sign Mr. McGann’s new letter agreement, PPI and McGann, in

furtherance of their scheme to defraud the Harolds and convert their property, appear to have

“treat[ed] her like a shareholder” in spite of her refusal. In this regard, PPI and McGann

identified Mrs. Harold as a “shareholder” in corporate documents prepared for execution on the

day of closing. Specifically, on the same day as closing with S&M NuTec, shareholders of PPI,

(now know as PPI Pet Products, Inc.)executed a Shareholders Agreement and Related

Documents. Schedule 2 thereof was titled:

Distribution of Closing Payment

PILL POCKETS INC.

SCHEDULE OF DISTRIBUTION TO SHAREHOLDERS

Exh. E. Unbeknownst to the Harolds, Mrs. Harolds was identified on this list shareholders as

“Harold Royalty at 2.09%” and next to the Harold name PPI and McGann identified her

distribution of “closing payment” to be $15,026. This amount, however was far less than was

actually past due the Harolds, which past due amount, based upon their entitlement to a 5%

royalty, exceeded $40,000. Moreover, consistent with PPI and McGann’s prior practice of

refusing to pay royalties, and in furtherance of PPI and McGann’s scheme to defraud, they have 

not forwarded this distribution to Mrs. Harold, nor did they even apprise her of its existence

prior to her retaining counsel and rescinding the HLA on March 18, 2005.

On March 18, 2005, counsel on behalf of the Harolds rescinded the HLA and tendered

and returned the $1,500 previously paid by McGann and Harold, believing this to be the total

amount of payments received by Robert George Harold and the Harolds. ¶66. Thereafter,

counsel for McGann and PPI advised that $2,000 in total had been paid since 1997. Accordingly,

on March 31, the balance of $500.00 was sent via Federal Express by counsel for the Harolds to

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 21 of 75
21

counsel for McGann and PPI for the purpose of tendering and returning any and all monies

purportedly received by the Harolds under the HLA. The Harolds have never received any other

benefit pursuant to the HLA. ¶66. 

On March 24, 2005, after Plaintiff’s rescission letter was received, Mark A. Watkins,

Esquire wrote to Plaintiff’s counsel on behalf of Mr. McGann and PPI. Exh. F. In this letter,

Mr. Watkins acknowledged that the original terms of the HLA were never altered by agreement

of the parties. This is in contradistinction to the unsupported statement in the McGann

Memorandum of Law (p. 6) that at some time after Mr. Harold’s death, “McGann and Plaintiff

agreed to convert the method of payment under the Harold/McGann Contract from a royalty on

sales to a royalty on dividends for the investment of seed capital to build and fund the business.” 

Specifically, Mr. Watkins wrote that: 

Dr. McGann did approach the Harold family in early March 2005, with an

alternative business proposal, which they have since rejected. Thus, the proposal

has not altered the terms of the original agreement.

(Emphasis supplied). 

Despite this acknowledgment, Mr. Watkins conceded that no monies were reserved or 

segregated from net sales to make payment to the Harolds. Instead, all sales monies were

presumably used as “seed capital.” In this regard, Mr. Watkins claimed that his firm was holding

in escrow in excess of $40,000 for the benefit of the Harolds provided they agree to execute a

release. Payment of these funds, however was only made “possible” by the closing with S&M

NuTec: “As you are well aware, the transaction with S&M NuTec was only recently completed

making the payment, now held in escrow possible.” This statement is extraordinary at least in

that there had been sales and revenues resulting therefrom for the preceding 1 1⁄2 years, and from

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 22 of 75
11Presumably MAW is Mark A. Watkins.

22

such revenue timely royalty payments should have been paid. In point of fact though, there was

no reason, other than Defendants’ conversion of the royalties due, as why prompt and proper

payment of the royalties were not “possible.” Moreover, any hint that PPI and McCann ever

intended to pay royalties on net sales is belied by the Schedule of Distribution from the S&M

Nutec sale prepared on March 7, 2005.

Despite Mr. Watkins’ statement on March 24, 2005 that monies in excess $40,000 were

present in his firm’s escrow account for the benefit of the Harolds, a Trust Table Report

identified that the funds were not placed in escrow until the next day on March 25, 2005. Exh G. 

This Table further identifies this transaction as:

Proceeds form sale of company held in Trust for client (Harold) - do not release

until instructed by MAW11

Moreover, this notation belies any true escrow account. There was no escrow agreement. There

was no agreed upon escrow agent. And, there was no reason for any escrow, as the funds

purportedly deposited should have been previously paid over at least the prior 1 1⁄2 years when,

instead, Defendants were converting the funds for their own use as “seed capital.” Memorandum

of Law at 6. The condition that the funds were not to be released “until instructed by MAW”

(presumably Mark A. Watkins) also makes deposited upon the whim of Mr. Watkins. Moreover,

it is baffling as to why the notation of “held in Trust for client (Harold)” was made. (Emphasis

supplied). The Harolds were never Mr. Watkins’ client and, indeed, as of March 25, 2005, was

known by Mr. Watkins to be adverse to Mr. Watkins’ clients - Mr. McGann and PPI. 

On March 28, 2005, Mr. Watkins associate Ross Babbitt corresponded again with

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 23 of 75
12Again plaintiff accepts this limited admission but disputes Mr. Babbits’ statement that

that this understanding was “based on conversations with Robert W. Harold, and reiterated to

Mrs. Harold by Dr. McGann in written correspondence.”

23

Plaintiff’s counsel. McGann Exh. B. This time, Mr. Babbit conceded that sales numbers had not

previously been reported: “Reporting sales was understood not to be necessary...”12 With regard

to the monies in “escrow,” Mr. Babbitt stated:

Concerning your request for clarification on the amounts being held in escrow,

please be advised that my office is holding in escrow $41,514 which represents

5% of sales (through December 31, 2004) of the product covered by the valid

claims of the Harold patent. Sales of the product did not begin until October of

2003. Royalties for the six months ended June 30, 2004 total $15,327, the

approximate amount Mr. McGann has been trying to give your clients for some

time now. Sales for the six months ending December 31, 2004 will not be

finalized until March 31, 2005, but royalties for these sales will be $26,331. 

These fund are, and have been, held in this firm’s escrow account. We are

prepared to release these funds immediately but only after the allegations set forth

inn your letter have been withdrawn. You will continue to receive payments

semi-annually on sales made until the full value of the Agreement has been

reached.

Finally Mr. Babbitt confirmed that S&M NuTec was advised of the Plaintiff’s rescission of the

HLA and the Harolds’ “claim to ownership of the patent.” 

ARGUMENT

1. Defendants Brian McGann and PPI’s Payment and Reporting Obligations Were

Not Suspended Pending the Appointment of a Personal Representative for the

Estate of Plaintiff’s Decedent On March 31, 2005

Mr. McGann and PPI principally contend that they have not breached any legal duty to

the Estate because there was no one to whom royalty payments could be made prior to the

appointment of Robert George Harold as the Estate’s Personal Representative on March 31,

2005. 

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 24 of 75
13To the extent the Court does not believe this is a reasonable inferences for the purposes

of Rule 12(b)(6), Plaintiff requests leave to amend the complaint to make an affirmative

allegation of same.

24

The Complaint is premised on the faulty assumption that after the death of

Harold, royalties due under the Harold/McGann Contract should be made to any

family member and that any family member has the right to accept such payments

on behalf of the estate. The law does not, however, support Plaintiff’s assertions.

* * *

Because there was no legal entity or person to which McGann could rightfully

make the payment of royalties until March 31, 2005, McGann and PPI could not

have breached any obligation to make payments under the terms of the

Harold/McGann Contract because payments could not be paid until a personal

representative had been appointed for the Harold estate. By the time the estate had

been filed on March 31, 2005, current royalties for the period had already paid or

were in escrow for the benefit of the Harold Estate.

McGann Memorandum of Law at 13-14. In other words, Defendants claim that any obligation

they owed was suspended and obviated until an estate was raised, and therefore shame upon the

Harolds for not having raised an estate sooner. This argument, however, comes with poor grace

given the record reflecting that after Mr. Harold passed away, Defendant McGann in an apparent

effort to lull and defraud the Harolds agreed to make payments and account directly to Dorothy

Harold, the decedent’s widow, to whom Mr. McGann elected to deal with either as a surrogate

for the Estate or otherwise. The Harolds relied upon this agreement for a substantial period of

time and, accordingly, it is reasonable to infer that as a result of this reliance they did not cause

the official appointment of a Personal Representative until March 31, 2005.13 Accordingly,

Defendants are equitably estopped from changing their position at this time.

In Chemical Bank v. Dippolito, 897 F. Supp. 221, 224 (E.D. Pa. 1995) (Joyner, J.), the

District Court found that Pennsylvania applies the Doctrine of Equitable Estoppel to “prevent a

person from taking a position that is inconsistent with a position previously taken or acting

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 25 of 75
14This document was provided by Defense counsel to Plaintiff’s counsel on or about May

17, 2005 after the Complaint was filed. 

25

differently than the manner in which that person induced another person by word or deed to

expect.” The elements necessary to invoke this estoppel are “(1) an inducement, whether by act,

representation, or silence when one ought to speak, that causes one to believe the existence of

certain facts; (2) justifiable reliance on that inducement; and (3) prejudice to the one who relies

if the inducer is permitted to deny the existence of such facts.” See also, Precision Door Co. v.

Meridian Mut. Ins. Co., 353 F. Supp. 2d 543, 559-560 (E.D. Pa. 2005)(Brody, J.). 

In this case, after Mr. Harold died, both his widow and his son contacted Mr. McGann

who was by then a lawyer and was representing himself at least in writing as a Doctor of

Jurisprudence. During these conversations, Mr. McGann assured the Harolds that despite the

passing of Mr. Harold, he “would honor the contract.” Cmplt at ¶31-32. This promise was later

memorialized in the Disclosure Schedule attached as Exhibit D to PPI’s PSPA: “Though Harold

has since passed away, McGann will make payment directly to his spouse.”14 In purported

compliance with this agreement, Mr. McGann and PPI wrote to Dorothy Harold on January 15,

2005 and enclosed a check for $1,000 payable to her as “Payment of Royalties on Equity

Received by B. McGann.” Mr. McGann and PPI further induced Mrs. Harold to deal directly

with them by stating in their letter addressed to Mrs. Harold:

• “I wanted to give you an update on the progress that Pill Pockets is making”

• “the agreement between us remains my personal obligation” 

• “I am happy to send you that portion of any dividends or equity I receive up to the stated

maximum”

• “I am enclosing your first check”

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 26 of 75
26

• “I will also be reporting to you on a quarterly basis instead of twice of year”

• “This will keep you better informed of the happenings of the company”

(Emphasis supplied).

Again the second check sent on September 14, 2004 for $500.00 was made payable to

Mrs. Harold. Mr. McGann and PPI further induced Mrs. Harold to deal directly with them by

stating in their letter addressed to Mrs. Harold:

• “I wanted to update you on the progress of Pill Pockets” 

• “As you can see, we are nearing the point where we will be a profitable company with a

broad product line”

• “I am also enclosing a check for $500 for you”

• “checks to you will become more regular.”

Cmplt. Exh. G. (Emphasis supplied).

In their letter dated March 3, 2005, Mr. McGann and PPI again made the following

representations:

• “As for your mom and her part in the process, it is my intention with this new agreement

attached that she be able to take part in the payment stream for the full 13 years of the

S&M NuTec agreement (if necessary), instead of her payments terminating at the

expiration of claims of the Harold patent in May of 2008.”

• “the current agreement between us calls for payment on sales of product, while the

attached, proposed agreement will treat her like a shareholder of our company and pay

her also on the closing process of the sale of Pill Pockets as a company which includes

other patents, equipment, and trademarks.”

• “I told your mom that I would pay her 5% of any dividends I received up to her

maximum. Though I sent her $1,500 over this period, it has actually gone the other way

with my wife and I contributing approximately $250,000 to the Company and a mortgage

on our house to secure the line of credit with our bank.”

• “What I have had the board of Pill Pockets approve, is to take the agreement I have

personally with your mom, and make it a company obligation to be paid at each

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 27 of 75
27

distribution of proceeds of the shareholders of Pill Pockets. Since I control 41.84% of

Pill Pockets, your mom’s 5% share of my holdings translates into 2.09% of the total to

the shareholders up to the cap of $100,000.”

• “we have extended the period your mom could be paid from 3 years to 13, as well as

made her a part of the closing proceeds and not just sales of product.”

• “she will be paid 2.09% of the initial distribution to shareholders”

• “Your mom’s share would therefore be $14,630"

• “your mom will receive 2.09%”

• “Your mom will be entitled to receive 2.09% of the amount of these distributions as well

until she reaches the full $100,000.”

Cmplt. Exh. H. (Emphasis supplied). 

These statements reflect that Mr. McGann and Pill Pockets were in fact dealing with and

making payments to Mrs. Harold as a surrogate for the Estate, and that there was an agreement to

do so. As a result of Defendants’ course of conduct, the Harolds were induced not to raise an

estate and appoint a personal representative prior to March 31, 2005 and the Defendants are

equitably estopped form taking a legal position that they were excused form paying royalties

because no estate had been raised.

Moreover, McGann and PPI concede that under “exceptional circumstances,” an heir has

“the right” to “collect debts due the estate.” McGann Memorandum of Law at 13. In this

regard, the Pennsylvania Supreme Court held that where there are no debts to be paid and no

distribution needed, a personal representative need not be appointed to maintain actions for

trespass, trover or “account render” of estate property.

While it is true that administration is the legally-appointed channel through which

an absolute title to personal property of an intestate is acquired, it is equally true

that the property of such intestate passes at his death to those legally entitled to

the succession, subject to the claims of creditors and the laws in force for

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 28 of 75
28

administering it; but, if there be no debts to pay and no distribution needed,

administration is not indispensable to that dominion over the property which is

necessary to maintain trespass, trover, or an action of account render.

Roberts v. Messinger, 134 Pa. 298, 309-310, 19 A. 625, 625 (Pa. 1890). This holding is

consistent with the provisions 20 Pa.C.S.A. 301(a) delineating to whom legal title to the personal

estate passes upon a decedent’s demise: “Legal title to all personal estate of a decedent shall pass

at his death to his personal representative, if any, as of the date of his death.” (Emphasis

supplied). Thus, as the Superior Court explained in Brothers Estates,

[Appellant’s] basic premise is that title to personal property of an intestate vests

in his administrator, and she takes the novel stand that the rights of an heir to a

distributive share are fixed as of the time of distribution and not of the time of the

intestate’s death.

The contention is patently unsound. The rights of distributees of the personal

property of an intestate vest immediately upon his death, subject only to the

satisfaction of debts and charges, and administration according to law. If an

administrator is appointed, he holds the legal title, but in trust for the purpose of

administering the estate. The rights of the distributees are fixed at the instant of

death. This is the clear and undeviating doctrine of all our cases.

156 Pa. Super. 292, 294-295, 40 A.2d 156, 157 (Pa. Super. 1944). In this case there is no

evidence in the record that the Estate had any creditors, nor is there any dispute among the

intestate heirs, Mr. Harold’s widow and their two children. To the extent this Court requires

these matters to be affirmatively pled, Plaintiff is in a position to so plead upon information and

belief. 

2. Defendants McGann and PPI Violated Their Duty to Plaintiff by Completely Failing

to Make “Appropriate and Reasonable” Royalty Payments under the Agreement of

Sale. 

Defendants McGann and PPI ask this Court to dismiss Count II (Breach of Contract -

Rescission - Avoidance) because as “royalties (sic) payments were made consistent with the

Case 2:05-cv-01493-AB Document 21 Filed 08/01/05 Page 29 of 75
15To artificially inflate the amount of “royalties” they claim to have paid, Defendants now

mis-characterize this payment as “$500 in advance royalties were paid to Harold in 1997.” This

characterization, however, is unsupported by the terms of the HLA which makes this payment

unconditional and unrelated to any future net sales. Rather, the check accompanied the partially

executed HLA Mr. McGann sent to Mr. Harold in May 1997. The HLA provided: “By signing

below, and acknowledging the receipt and acceptance of the enclosed $500.00, you hereby sell

and assign the above patent under the following terms of sale.” The HLA further references this

payment of $500.00, simply stating “Bryan McGann will pay Bob Harold the sum of $500.00.” 

A royalty, on the other hand, is “compensation for the use of property ... expressed as a

percentage of receipts from using the property or as an account per unit produced.” Black’s Law

Dictionary (6th Ed. 1990).

29

terms of the Harold/McGann Contract, there could be no breach of failure to pay royalties.” 

McGann Memorandum of Law at 16. Defendants argue that because”McGann made appropriate

and reasonable payments under the terms of the Harold/McGann Contract,” they breached no

legal duty. McGann Memorandum of Law at 14. The record, however, supports Plaintiff’s

allegations, and indeed a jury could well find that no “royalty” payments were made under “the

terms of the Harold/McGann Contract.” 

The purchase price for the Patent under the HLA included an initial payment of $500.0015

as well as “a royalty of 5% on net sales of products covered by the claims of the patent, up to a

total cap of $100,000.00 in cumulative royalty payments.” Only two payments totaling $1,500

were made after the initial $500.00 payment in May 1997, and neither payment was on account

of a royalty payment due under the terms of the HLA. Instead, the first check for $1,000.00 was

characterized by Mr. McGann and PPI as representing “5% of the proceeds received in the

merger with the Colorado company.” Similarly, the second and last check for $500.00 was

characterized by McGann and PPI as a mere “Advance on Royalty Payments” because Mr.

McGann was “not taking a salary and we have yet to reach break-even.” Cmplt. Exh. G. 

In truth and in fact, however, no “Advance” on royalty payments needed to be made as

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30

Mr. McGann and PPI had already realized substantial sales which should have generated royalty

payments well in excess of the $500.00 sent in September 2004 and the $1,000 sent the prior

January 2004. (Emphasis supplied). Indeed, net sales of products covered by the Patent

exceeded $35,000.00 in the second half of 2003 (upon which the 5% royalty would exceed

$1,800.00) and exceeded $300,000.00 in the first half of 2004 (upon which the 5% royalty would

exceed an additional $15,000.00). Instead of paying these monies to Dorothy Harold,

Defendants McGann and PPI pocketed same, without disclosure to the Harolds, to use as an

“investment of seed capital to build and fund the business.” McGann Memorandum of Law at 6. 

All the while though, Mr. McGann and PPI continued to reiterate, as late as March 3, 2005, that

“current agreement between us calls for payment on sales of product,” as well as offer assurance

in September 2004 that “checks to you will become more regular.” However, although net sales

in the second half of 2004 exceeded $500,000 (upon which the 5% royalty would exceed

25,000.00) no further payments were made. 

Moreover, since 1997 and during the time they were withholding and misappropriating

Plaintiff’s royalty monies, Defendants McGann and PPI were well aware that the Harolds were

in “pain” and “having tough days.” As described by Mr. and Mrs. Harold in their email to Mr.

McGann on July 13, 2002, just before Mr. Harold’s death, he and Mrs. Harold were under

“EXTREME” mental, physical and financial “stress.”

Dot and I were so happy to receive your letter, actually we were thrilled to death

as this was the first piece of good news in our life for a long long time. 

I was glad to here (sic) you received your law degree and both Dot and I were

especially glad to here (sic) about your four year old son as we are blessed with

four grandchildren, ages two to ten. I’m so sorry I haven’t written you sooner but

my wife and I have been under EXTREME stress for many months. My wife’s

mother started with alzheimers disease last year. She had been living alone in her

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31

own home for the past 25 years and we would help her whenever she needed it,

Pay her bills, see to her medicines, doctors visits, etc. Over the past several

months her health deteriorated and we became nursing aides on a daily basis.

Finally we had to place her in a assisted living facility as it became

Overwhelming for us. Now my mother-in-law had no money except for her home

valued at 100K. All of a sudden out of the woodwork my in-laws (Dot’s brother

and sister-in-law) show up. They only came around once or twice a year to visit

even though they only lived 80 miles away. Now they have her sign over and sell

her home, get power of attorney and move her close to where they live.

We couldn’t contest anything as unfortunately I lost mostly all of my retirement

and savings over the past few years as three of my investment companies went

bankrupt. Along with all of this my step father is in a rehab facility recovering

from a stroke. Now my mother is by herself and wants me to come see her more

often as she is afraid to live alone. She lives seventy miles away in New Jersey.

Well as you might have guessed my migraines are much worse causing me to

seek medical attention weekly. (Narcotic injections) Unfortunately none of the

new migraine medications help me...Now I’m really sure you understand how

happy Dot and I were after hearing from you.

Good luck at the show and thanks for your persistence.

By mis-characterizing the payments and failing to properly account for the net sales

Defendants McGann and PPI materially and deliberately misled the Harolds and concealed from

them material information which they had a duty to disclose including, but not limited to, the

fact that funds due the Harolds were not being paid but instead were being converted by

Defendants McGann and PPI for their own use in violation of the Agreement of Sale. 

Specifically, McGann and PPI wrote the Harolds that:

• “the agreement between us remains my personal obligation” January 15, 2004.

• “As you can see, we are nearing the point where we will be a profitable company.... I am

enclosing a check for $500 for you. Even though I am not taking a salary and we have

yet to reach break-even, I believe that will change soon and I will regularly receive salary

and dividends and checks to you will become more regular.” September 14, 2004.

• “Though I sent her [Dorothy Harold] $1,500 over this period, it has actually gone the

other way with my wife and I contributing approximately $250,000 to the Company and

a mortgage on our house to secure the line of credit with our bank.” March 3, 2005.

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In addition to these written representations, from 2002 through early 2005, Robert William

Harold would periodically call Mr. McGann to ask for updates. At no point did Mr. McGann

inform Robert William Harold of the net sales of product. Instead, Mr. McGann told Robert

William Harold on one or more occasions that no money was being made and that Mr. McGann

was not even taking a salary. Upon information and belief, Mr. McGann and PPI’s statements,

mis-characterizations and failures to report net sales were part of a conspiracy to convert

Plaintiff’s property (including the royalty payments already due and owing) to their own use and

to defraud the Harolds by such means and by creating the false impression that products covered

by the Patent were not generating significant sales. Accordingly, Plaintiff has averred more than

sufficient facts to contest Defendants bare claim that “McGann made appropriate and reasonable

payments under the terms of the Harold/McGann Contract.”

Defendants also argue that because “The Harold/McGann Contract is silent on the timing

of royalty payments. It, therefore, did not impose any duty upon McGann to provide royalty

payments at specified times.” McGann Memorandum of Law at 15. Accordingly, Defendants

argue that they “adopted a reasonable course of performance such that royalties were paid on an

annual basis after yearly accounting records were complete (i.e., 90 days after year end).” Id. 

This position was clearly invented after the fact and most notably after Plaintiff gave notice of its

decision to rescind.

In this regard, the HLA required at least semi-annual payments. Why else would the

parties have provided for semi-annual accountings, if they were not to be accompanied by semiannual payments? Once the accounting is reported, there is no legitimate impediment or reason

not to make payment. The royalties are earned when the sales are made and they belong to the

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33

Harolds. As there is no other proper use of the monies, the accounting should trigger payment.

That the parties were waiting for year end is further belied by the actual payment history. 

The first payment was made on January 14, 2004, 76 days before the “90 days after year end”

Defendants now suggest is the time for payment. Moreover, Mr. McGann promised to increase

his required accountings from semi-annually to quarterly. Despite this commitment, his next

payment was made in September 2004, almost seven months before Defendants claim the next

payment would have been due on March 31, 2005 under the Defendants’ theory. Indeed in his

letter accompanying the September payment, Mr. McGann assured Mrs. Harold that payments

would become “more regular.” Thereafter, in March 2004, instead of offering the annual royalty

payment, as is now suggested would have been appropriate, Mr. McGann offered to pay Mrs.

Harold a dividend in the amount of $14,630.00 provided she sign a release and agree to cancel

the HLA. Only after plaintiff rescinded the HLA on March 18, 2004, did Defendants claim to

escrow monies to pay royalties on net sales. That this was an afterthought is made clear by the

fact that no monies were reserved or segregated from the company’s net sales to make the

royalty payments, and that monies “escrowed” on March 25, 2005 were only available from

proceeds of the sale to S&M NuTec. 

Moreover, at the time Defendants received the S&M NuTec proceeds on March 7, 2005,

they purported to schedule a distribution of $15,026.00 to Mrs. Harold as a “shareholder,”

however, they never paid this “distribution” to their “shareholder” nor did they inform the

Harolds that such distribution was scheduled. No doubt, had the sale never taken place,

Defendants would now claim that payment would be due at some time other than 90 days after

year end. Accordingly, this argument must be rejected.

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34

3. Defendants Breached the HLA By Completely Failing to Report on Net Sales Prior

to the Rescission of the HLA on March 18, 2005

Defendants McGann and PPI argue as a matter of fact that semi-annual reports were

made on net sales. This claim is ludicrous. There is no mention in any of the alleged “reports”

of net sales. To the contrary, although sales were being made at least beginning in 2003 through

2005, Mr. McGann never made mention of net sales in the correspondence during this time

frame. Moreover, during his “periodic” conversations with Robert William Harold through

2005, at no point did Mr. McGann inform him of any net sales of product. Instead, Mr. McGann

deceptively informed Robert William Harold on one or more occasions that no money was being

made and that he was not even taking a salary. 

As for the period prior to 2003, there is no evidence of record that sales were made. 

Moreover, even assuming sales were not being made, Mr. Harold was under an obligation to

report on same. Otherwise, Mr. Harold not make an intelligent decision whether to exercise his

right to exchange his rights to royalties for a lump sum payment of $3,000.00 as provided in the

HLA. If sales were zero, Mr. McGann should have just reported same. 

4. Defendants McGann and PPI Breached the HLA by Reselling the Patent Without

Providing That the Obligations under the HLA Would Survive the Sale and Become

the Responsibility of the New Owner

Again, ignoring the facts of record, Defendants claim that they did not violate the HLA

by transferring the Patent without providing that the new owners would maintain the obligations

under the HLA including, most importantly, the obligation to pay royalties on net sales. The

evidence is rather clear that both Mr. McGann and PPI failed to live up to this obligation. First,

the PPI Preferred Stock Purchase Agreement specifically provides that the obligation to make

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35

royalty payments and report were not be transferred to PPI when Mr. McGann initially

transferred the patent. Thereafter, when the Patent was transferred to S&M NuTec, the Closing

Documents made clear that the obligation under the HLA would remain with Mr. McGann. As

has been made rather clear, the Harolds did not agree to this sale with this provision. 

Accordingly, Defendants argument is without merit.

5. Defendants McGann and PPI Breached the HLA By Failing to Timely Develop,

Market and Sell Product

Plaintiff alleged in Paragraph 65(g) of the Complaint that Mr. McGann breached the

HLA and his legal duties by his “Failure to timely pursue the development, marketing and sales

of products under the patent.” In this regard, Plaintiff avers that “defendant McGann undertook

to use best efforts and/or reasonable and/or timely efforts to market and produce the product to

be developed from the aforesaid patent so that plaintiff’s decedent could receive up to $100,000

in sales royalties.” Defendant McGann, however, asserts that Plaintiff’s claim must fail “as a

matter of law” because the HLA is “silent.” Defendants argument is wrong both as a matter of

law and a matter of fact.

First, “as a matter of law,” best efforts are implied when there has been a transfer of an

exclusive right. Almost ninety years ago, Justice Cardozo addressed the issues of implied best

efforts in the context of contracts to exclusively deal in his landmark Lady-Duff Gordon opinion.

It is true that he does not promise in so many words that he will use reasonable

efforts to place the defendant’s endorsements and market her designs. We think,

however, that such a promise is fairly to be implied. The law has outgrown its

primitive stage of formalism when the precise word was the sovereign talisman,

and every slip was fatal. It takes a broader view to-day. A promise may be

lacking, and yet the whole writing may be “instinct with an obligation,”

imperfectly expressed. If that is so, there is a contract.

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36

The implication of a promise here finds support in many circumstances.

The defendant gave an exclusive privilege. She was to have no right for at least a

year to place her own endorsements or market her own designs except through the

agency of the plaintiff. The acceptance of the exclusive agency was an

assumption of its duties. We are not to suppose that one party was to be placed at

the mercy of the other.

Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 90-91 (N.Y. 1917). As the Third Circuit, citing

Lady-Duff Gordon explained, “Where an owner of a product gives an exclusive agency, solely in

return for royalties, but no promise is expressed on the part of the agent to use his best efforts to

promote it, the courts have implied such a promise.” HML Corp. v. General Foods Corp., 365

F.2d 77, 80 (3d Cir., 1966) (applying New York law). Pennsylvania, whose law informs the

contract at issue, follows Justice Cardozo. See Maxwell v. Schaefer, 381 Pa. 13 (Pa. 1955). 

The fact that Maxwell did not, in express terms, promise to devote his best efforts

to the sale of “Spritzit” did not mean that he was not bound contractually to do

so.... In the instant case, Maxwell promised to forego distribution of products

similar to “Spritzit” and, since his profits depended entirely on the volume of

sales he was able to create for the product, it may fairly be inferred that all parties

to the agreement fully intended and expected him to devote reasonable effort to

the promotion of “Spritzit”.

Maxwell, 381 Pa. at 18 (Pa. 1955), citing Wood v. Lucy, Lady-Duff Gordon, supra. Similarly, in

Jamison v. Concepts Plus, Inc., 552 A.2d 265, 269-270 (Pa. Super. 1988), the Superior Court

found that when the benefits to one party of a contract are solely dependent upon the other

party’s “effort to bring about the happening of the condition to his promise” this effort must be

made with “diligen[ce] anf good faith.” If these duties were not implied, the promise or

obligation would be illusory, and the other side would be left to the promisors “whim – ‘I will if

I want to.’”

The parties here intended a contract for the sale of real estate. The agreement was

entered into with the understanding that both parties were firmly committed to the

performance of the agreement provided that cooperation would be forthcoming

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37

from the borough council. The buyer has wisely protected himself, with the

seller’s consent, against the possibility that he is unable to obtain the license. In

so doing, however, Jamison has impliedly promised to make a diligent and good

faith effort to bring about the happening of the condition to his promise.

Following the general principles of contract law, we observe that if no duty is

implied or imposed upon the buyer in this situation, there is no contract. The

buyer’s promise or obligation is illusory. If in fact Jamison was under no

obligation initially to proceed with approval proceedings, then the language of the

contract is rendered meaningless. Jamison would have bound himself to nothing,

and performance would be left to his whim -- “I will if I want to.” As one author

has noted: “[T]he practice of making promises will lose much of its effectiveness

in an economic order of co-operation and exchange if promises are to be

performed only when it suits the promisor’s convenience.” Patterson,

Constructive Conditions in Contracts 3 , 42 Colum.L.Rev. 903, 953 (1942).

* * *

In the case before us, the contract specifically stated that the “Buyer shall be

responsible for obtaining all necessary approvals and permits for the subdivision

of the subject premises . . . .” Under these circumstances, as in the analogous

situation of a mortgage contingency clause, we find no significance in the absence

of words such as “due diligence,” “reasonable efforts,” or “best efforts.” The

statement that “Buyer shall be responsible for obtaining all necessary approvals

and permits for the subdivision” cannot reasonably be interpreted, as the trial

court states, to mean that Buyer was “under no obligation” to do anything. We

must hold the promisor to the reasonable meaning of his or her words in order to

protect the needs of society and trade as well as the promisee’s justified reliance

upon a promise.

Jamison v. Concepts Plus, Inc., 552 A.2d 265, 269-270 (Pa. Super. 1988). Similarly in Slater v.

Pearle Vision Center, Inc. the Superior Court found that “where it is clear that an obligation is

within the contemplation of the parties at the time of contracting or is necessary to carry out their

intentions, the court will imply it . . . even where the contract itself is not ambiguous.” 376 Pa.

Super. 580, 546 A.2d 676, 679 (Pa. Super. 1988).

In the case of exclusive dealing, Judge Alito explained the reasons underlying the

imposition of a duty of best effort when compared to non-exclusive relationships. 

In a non-exclusive arrangement the buyer’s efforts in reselling the product may

have little effect on the original seller. If the buyer does not resell the product, the

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38

seller, without breaching the contract, may solicit orders from other potential

buyers. By contrast, in an exclusive dealing arrangement the seller has only one

outlet for its goods. It is obligated not to sell to anyone except the buyer. In such a

situation, the seller’s interests are inextricably bound up with the success of the

buyer in reselling the product. The obligation placed on the buyer to use best

efforts reflects its monopoly power; the exclusivity arrangement makes the seller

as subject to the decisions of the buyer as a subsidiary within the buyer’s firm.

The obligation of best efforts forces the buyer/reseller to consider the best

interests of the seller and itself as if they were one firm.

Tigg Corp. v. Dow Corning Corp., 962 F.2d 1119, 1125 (3d Cir. 1992)(Emphasis

supplied)(applying Michigan law, the Court found that “The obligation to use best efforts to

resell a product is imposed upon those buyers engaged in ‘exclusive dealing in the kind of goods

concerned . . . .’ This obligation is intended to protect the original seller, who in an exclusive

arrangement depends solely upon the buyer to resell the goods.”) See also Huang v. BP Amoco

Corp., 271 F.3d 560, 564-565 (3d Cir. 2001)(applying Pennsylvania law) (“Because of the

implied covenant of good faith, an approvals contingency clause does not give a lessee an

absolute right to terminate the lease without penalty. Rather, the lessee must make a diligent and

good-faith effort to obtain the required approvals.”).

Similarly, Pennsylvania has adopted the doctrine of necessary implication. This doctrine

provides that: 

in the absence of an express provision, the law will imply an agreement by the

parties to a contract to do and perform those things that according to reason and

justice they should do in order to carry out the purpose for which the contract was

made and to refrain from doing anything that would destroy or injure the other

party’s right to receive the fruits of the contract.

Somers v. Somers, 418 Pa. Super. 131, 137-38, 613 A.2d 1211, 1214 (Pa. Super. 1992); see also

E.A. Farnsworth, Contracts § 7.17 at 527 (1982) (“A party may thus be under a duty not only to

refrain from hindering or preventing the occurrence of conditions of his own duty or the

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39

performance of the other party’s duty, but also to take some affirmative steps to cooperate in

achieving these goals.”).

In this case, having bargained for the exclusive patent right and pledged to pay royalties

based upon the net sales of products covered by the patent, Mr. McGann was obliged use his best

efforts to bring products to market.

Moreover, the contract is not “silent” on the issue of best efforts and/or reasonable

efforts, as Defendants claim. The contract very clearly states that “In the event of unforeseen

delays in the generation of sales, Bob Harold can exchange his royalty options for cash equal of

$3,000.00 which is substantially equal to the patent sales price originally agreed upon between

the parties.” This makes rather clear that at the time the agreement was signed, the parties

foresaw no delays in generating sales, otherwise the parties would have referenced “foreseeable

delays” instead of “unforeseen delays.” By matriculating to law school in 1998 and making no

reasonable efforts commercialize the patent until at least 2002, instead of devoting his energies

to generating sales, Mr. McGann breached the HLA. Moreover, he then used this breach as a

weapon against Mrs. Harold to have her sign a release in March 2005, when he explained that

she should sign his new letter agreement making her a shareholder and releasing Mr. McGann

because:

As for your mom and her part in the process, it is my intention with this new

agreement attached that she be able to take part in the payment stream for the full

13 years of the S&M NuTec agreement (if necessary), instead of her payments

terminating at the expiration of claims of the Harold patent in May of 2008.

Cmplt Exh. H. Had Mr. McGann not neglected his responsibilities under the HLA, Mrs. Harold

would not have been faced with this dilemma.

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40

6. Defendants McGann and PPI’s Breaches Were Not Excused

Defendants McGann and PPI claim that any breaches they committed were “excused by

Plaintiff through waiver and/or modification.” McGann Memorandum of Law at 20. 

Defendants argue that “If Plaintiff thought he had the right to require more frequent payments or

payments on a different time schedule, that right was not asserted and is now waived.” Id. at 22. 

This argument, however, assumes Plaintiff’s knowing acquiescence, and, given the facts as pled

in this case, is absurd.

First, the Harolds were never informed, and hence never had the opportunity to object

that their royalties were being reinvested back into PPI as “seed capital.” Moreover, as pled in

the complaint and discussed ad nauseam above, between 2002 and 2005 Mr. McGann informed

Robert William Harold that”no money was being made” and he “was not even taking a salary” in

an attempt to create the false impression that products covered by the Patent were not generating

significant sales. Moreover, in his written communications he attempts to give the impression

that there were no net sales by making a $500 payment towards an “Advance” on royalties,

stating that: 

I am also enclosing a check for $500 for you. Even though I am not taking a

salary and we have yet to reach break-even, I believe that will change soon and I

will regularly receive salary and dividends and checks to you will become more

regular.

Cmplt Exh. G. Mr. McGann also promised both Mrs. Harold and Robert William Harold that he

“would honor the contract.” Finally, in February 2003, it is stated in the PPI Preferred Stock

Purchase Agreement that the obligation under the HLA would remain Mr. McGann’s

obligations, and then, as late as March 7, 2005, it is agreed in the asset purchase agreement with

S&M NuTec that the HLA would remain as a “Retained Liabilit[y].” Most importantly though,

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41

Mr. Watkins, the lawyer for McGann and PPI, agreed that the original agreement had not been

“altered.” Accordingly, Defendants’ argument must fail. See Exh. F.

7. Plaintiff Has Pled Sufficient Facts to Establish a Claim for Rescission and

Avoidance

Pennsylvania law recognize multiple grounds for rescission. Among the permissible

grounds are breach of fiduciary duty and/or confidential relationship, a material and substantial

breach, a wilful refusal to pay consideration, fraud in the inducement and repudiation of the

contract. Plaintiff will address each of these grounds.

a. Rescission is Appropriate Because Defendants McGann and PPI Breached

Their Fiduciary/Confidential Relationship With Plaintiff

Defendants argue that rescission is only possible when there has been fraud. This is not

the law of Pennsylvania. In Frowen v. Blank, the Pennsylvania Supreme Court described the

availability of rescission in case where there has been a breach of a fiduciary/confidential

relationship.

As previously noted, appellant argues in the alternative that the record establishes

the existence of a confidential relationship between decedent and appellee. If a

confidential relationship has been established on this record, our earlier finding

that appellant had failed to affirmatively show fraud would not preclude appellant

from some relief. Rescinding a contract because of fraud calls into play one set of

criteria; rescission based on the breach of a confidential relationship is another

proposition.

When the relationship between the parties to an agreement is one of trust and

confidence, the normal arm’s length bargaining is not assumed, and overreaching

by the dominant party for his benefit permits the aggrieved party to rescind the

transaction. This is so because the presence of a confidential relationship negates

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42

the assumption that each party is acting in his own best interest. Once a

confidential relationship is shown to have existed, it then becomes the obligation

of the party attempting to enforce the terms of the agreement to establish that

there has not been a breach of that trust.

We agree with Judge Spaeth in his dissent in Frowen II that if such a relationship

did exist between the decedent and the appellee, finding that the decedent

understood the terms of the agreement does not necessarily preclude a finding that

the relationship had been breached. Where a confidential relationship exists, the

law presumes the transaction voidable, unless the party seeking to sustain the

validity of the transaction affirmatively demonstrates that it was fair under all of

the circumstances and beyond the reach of suspicion. The crux of the controversy

presently before us is whether the record here establishes the existence of a

confidential relationship.

Frowen v. Blank, 425 A.2d 412, 416 (Pa. 1981)(Emphasis supplied). Similarly, to the extent

Plaintiff here has pled sufficient facts to establish a fiduciary and/or confidential relationship, his

claim for rescission must survive.

Under Pennsylvania law, “Fiduciary or confidential relationships arise when one party

places confidence in another with resulting superiority and influence on the other.” Temp-Way

Corp v. Continental Bank, 139 B.R. 299, 318 (E.D.Pa. 1992). Thus, “[a] confidential relation

exists between two persons when one has gained the confidence of the other and purports to act

or advise with the other’s interest in mind.” Frowen v. Blank, 493 Pa. 137, 148, 425 A.2d 412,

418 (1981), citing the Restatement of Trusts 2d, § 2(b). Further, in Basile v. H&R Block, the

Superior Court noted that: 

Our Supreme Court has acknowledged that “the concept of a confidential

relationship cannot be reduced to a catalogue of specific circumstances,

invariably falling to the left or right of a definitional line.” The Court has

recognized, nonetheless, that “the essence of such a relationship is trust and

reliance on one side, and a corresponding opportunity to abuse that trust for

personal gain on the other.” Accordingly, “[a confidential relationship] appears

when the circumstances make it certain the parties do not deal on equal terms,

but, on the one side there is an overmastering influence, or, on the other,

weakness, dependence or trust, justifiably reposed[.]” The Supreme Court’s use in

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43

Frowen of the disjunctive “or” to separate the cognizable characteristics of

confidential relation is critical. Contrary to the trial court’s determination in this

case, our law does not require both “overmastering influence and, . . . weakness,

dependence or trust.” Indeed, both elements need not appear together as “in both

an unfair advantage is possible.”

777 A.2d 95, 101 (Pa. Super. 2001). The Court further noted that: 

disparity between the respective parties is to be adjudged subjectively, and may

occur anywhere on a sliding scale of circumstances. Thus, in Frowen, the Court

concluded that a confidential relationship existed between an elderly widow who

sold her farm to a neighbor friend, not because the neighbor demonstrated any

particular level of strength or business savvy, but because the widow

demonstrated weakness and trust.

Id. at 102.

In this case, there is ample evidence to show both a demonstrated weakness and trust, as

well as overmastering influence, sufficient to survive a motion to dismiss. First Plaintiff

specifically pled in paragraphs 60 and 71 as follows:

69. At all times relevant to this Complaint, defendants McGann and PPI were in a superior

and dominant position to that of Robert George Harold and the Harolds whom they

solicited to place complete trust in their decision making and exercise of discretion and

good faith and to make appropriate accountings . 

* * *

71. At all relevant times, defendants McGann and PPI purported to act with respect to the

interest of Robert George Harold and his Estate in a fiduciary and/or confidential

capacity and caused Robert George Harold and the Harolds to trust and rely upon the

defendants treating them him fairly and dealing with them at a non-arms length, good

faith, fair dealing basis. 

Additionally, the complaint and most importantly the exhibits thereto further reveal the

following. In terms of demonstrated weakness the complaint establishes inter alia: 

1. The Harolds were completely dependent upon Mr. McGann and PPI to account for net

sales, as they had no independent access to this financial information.

 

2. At or around the time the HLA was executed, Mr. McGann knew and understood that

Mr. and Mrs. Harold were in “pain” and “were having tough days.” Cmplt. Exh. D.

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16As noted above, to the extent the Court believes more facts concerning the Harold

weakness would be material to its decision, Plaintiff requests leave to replead facts

demonstrating, inter alia, the Harolds’ lack of education, sophistication and business acumen,

including their lack of understanding of the differences between terms used by Defendants

including “royalties on dividends,” “royalties on sales” and “royalt[y] on equity.”

44

3. In July 2002 Mr. McGann knew and understood that:

• Mr. and Mrs. Harold were under “EXTREME stress”

• Mrs. Harold’s mother “started with alzheimers disease last year. She had been

living alone in her own home for the past 25 years and we would help her

whenever she needed it, Pay her bills, see to her medicines, doctors visits, etc.

Over the past several months her health deteriorated and we became nursing aides

on a daily basis. Finally we had to place her in a assisted living facility as it

became Overwhelming for us. Now my mother-in-law had no money except for

her home valued at 100K. All of a sudden out of the woodwork my in-laws (Dot’s

brother and sister-in-law) show up. They only came around once or twice a year

to visit even though they only lived 80 miles away. Now they have her sign over

and sell her home, get power of attorney and move her close to where they live.”

• Mr. and Mrs Harold had “lost mostly all of my retirement and savings over the

past few years as three of my investment companies went bankrupt.”

• Mr. Harold’s “step father is in a rehab facility recovering from a stroke [and] ...

my mother is by herself and wants me to come see her more often as she is afraid

to live alone. She lives seventy miles away in New Jersey. 

• Mr. Harold’s “migraines are much worse causing me to seek medical attention

weekly. (Narcotic injections)”

• “[n]one of the new migraine medications help” Mr. Harold.

As a result of these events, they explained to Mr. McGann in July 2002 “Now I’m really

sure you understand how happy Dot and I were after hearing from you.”

4. Mrs. McGann became a widow on September 29, 2002.16

The following facts show demonstrated trust:

1. Mr. Harold executed an agreement of sale and based receipt of his consideration upon the

good faith and trust he reposed in Mr. Harold, as he would receive no royalty payment

unless Mr. McGann worked diligently and made honest accountings as required under

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the agreement.

2. At the time the HLA was presented to Mr. Harold for his signature, Mr. McGann

represented that “[m]y attorney said that the letter format I had was fine for our purposes

as long as it is backed up by the formal assignment and sale agreement for recording in

the patent office.” Cmplt Exh. B.

3. On March 14, 2002 Mr. McGann, identifying himself as a Doctor of Jurisprudence and

an M.B.A., assured Mr. and Mrs Harold that he “never lost his desire to get Stow Away

to market” and that he “w[ould]l keep [them] informed of all events as they unfold.” 

Cmplt Exh. D.

4. After Mr. Harold’s passing, Mr. McGann assured both Mrs. Harold and Robert William

Harold that he “would honor the contract.”

5. During periodic phone calls from Robert William Harold to Mr. McGann between late

2002 through early 2005, Defendant McGann assured Robert William Harold that no

money was being made and that was not even taking a salary.

6. On January 15, 2004, signing as a Doctor of Jurisprudence, Mr. McGann assured Mrs.

Harold that “the agreement between us remains my personal obligation” and that “I spoke

with you son recently and told him that I will also be reporting to you on a quarterly basis

instead of twice of year as called for in the agreement. This will keep you better informed

of the happenings of the company.... I am truly excited about the possibilities we have to

make this effort successful.” 

7. On September 14, 2004, signing as a Doctor of Jurisprudence and a Ph.D., Mr. McGann

established trust by claiming that the he was sending a $500 check as an advance on

royalties “even though I m not taking a salary and we have yet to reach break-even” and

promising that “checks will become more regular.”

8. On March 3, 2005, signing as a Doctor of Jurisprudence and a Ph.D. as well as President,

Chairman and CEO of PPI, again attempted to establish trust by assuring the Harolds that

they were his priority because “though I sent [Mrs. Harold] $1,500 over this period, it has

actually gone the other way with my wife and I contributing approximately $250,000 to

the Company and a mortgage on our house to secure the line of credit with our bank.” 

He further assured them that the new agreement he was proposing that Mrs. Harold sign

would

a. “limit [her] risk;”

b. “treat her like a shareholder;” 

c. enable her “to take part in the payment stream for the full 13 years of the S&M NuTec 

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 Agreement ... instead of her payments terminating at the expiration of the claims of the 

 Harold patent in May of 2008;”

d. “make her part of the closing proceeds and not just sales of product;” and

e. entitle her to “guaranteed” payments. 

The following facts show Mr. McGann and PPI’s overmastering influence.

1. Mr. McGann and PPI were in the sole and exclusive possession of the net sales monies

and held exclusive access to their financial information, such that Plaintiff were entirely

dependent upon them to provide accurate and truthful accountings.

2. Mr. McGann consistently held himself out as, alternatively, an M.B.A, a Doctor of

Jurisprudence and a Ph.D.

3. Mr. McGann understood the Harold’s physical, emotional and financial weakness as well

as their lack of sophistication and education.

4. Mr. McGann was the dominant shareholder in PPI with 41.84% of the stock, as well as

President, CEO and Chairman, such that he could control PPI’s dealings vis-a-vis the

Harolds. Cmplt Exh. H.

In assessing the sufficiency of these allegation, the Court should bear in mind that

Federal Court is a notice pleading jurisdiction and as such, Plaintiffs simply need to plead

enough facts to put Defendants on notice of their claim. “This simplified notice pleading

standard relies on liberal discovery rules and summary judgment motions to define disputed facts

and issues and to dispose of unmeritorious claims.” Swierkiewicz, supra, 534 U.S. at 512. See

McHale v. NuEnergy Group, 2002 U.S. Dist. LEXIS 3307, *24-26 (E.D.Pa. 2002)(refusing to

dismiss claim for breach of fiduciary for the purposes of a Rule 12(b)(6) motion and

“assum[ing]” that a fiduciary relationship exists for that purpose.”) Accordingly, because a

“confidential relationship ... is usually a question of fact in each case,” in the context of a

demurrer under Federal Rule of Civil Procedure 12(b)(6), this Court would have to find that no

facts have been pled which could give rise to a confidential relationship. Francois v. Francois,

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599 F.2d 1286, 1291 (3d Cir. 1979) (applying Pennsylvania law). Defendants have not met this

burden.

Additionally, in the context of commercial dealing, the Pennsylvania Supreme Court has

recognized fiduciary relationships where “one party surrenders substantial control over some

portion of his affairs to the other.” In re Estate of Scott, 455 Pa. 429, 433, 316 A.2d 883, 886

(1974). This Court has also recognized “[a] business relationship may be the basis of a

confidential relationship if one party surrenders substantial control over some portion of his

affairs to the other.” Tyler v. O’Neill, 994 F. Supp. 603, 612 (E.D.Pa. 1998)(Joyner, J.). As

implied above, finding a fiduciary relationship in a commercial setting, and any other setting for

that matter, is fact dependant.

It is impossible to define precisely what constitutes a confidential relation. It is

not restricted to any specific association of persons nor confined to technical

cases of fiduciary relationship but is deemed to exist whenever the relative

position of the parties is such that one has power and means to take advantage of

or exercise undue influence over the other.

Young v. Kaye, 443 Pa. 335, 342-343 (1971) (internal citations omitted). Here, it is rather clear

that plaintiff has pled sufficient facts to show both that Mr. McGann and PPI had the “power and

means to take advantage of or exercise undue influence over the” Harolds, and that Mr. Harold

surrendered control over his business affairs to Mr. McGann when he agreed that he would base

his compensation upon net sales and Mr. McGann’s promise to account faithfully, since he

would otherwise have no control over the sales or the books and records to determine the sales. 

As the Court of Appeals of California held in Stevens v. Marco, 305 P.2d 669, 679 (Ca. App.

1956):

since Marco was in charge of the marketing of the device, plaintiff had also to

rely on his business judgment with respect to production, and on his fidelity with

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respect to keeping and furnishing honest accountings of sales. Here, too, Marco

occupied a superior position. There was present, therefore, all the classic elements

of a confidential relation, and Marco owed to plaintiff the fiduciary obligations of

utmost good faith and fair dealing of one occupying a status akin to that of a

trustee.

Since a fiduciary/confidential relationship is fact dependant, Defendants can try to challenge it

after discovery in a Motion for Summary Judgment. However, having put the defense on fair

notice, the claim should not be dismissed here.

Additionally, unbeknownst to the Harolds, they were involuntary investors in PPI who

contributed “seed capital,” and were labeled PPI and McGann as a shareholder. Under these

circumstances, both PPI as the company and Mr. McGann as an officer, director and dominant

shareholder owed a fiduciary duty to the Harolds as a matter of law in their capacity as

“shareholder” or investor. Haymond Napoli Diamond, P.C. v. Haymond, 2004 U.S. Dist. LEXIS

17276 (E.D. Pa. 2004)(Shapiro, J.)(“Officers and directors of a corporation owe a fiduciary duty

- a duty of loyalty - to the corporation and to its shareholders to act only for the benefit of the

corporation and the shareholders and to make proper disclosure of corporate activity.”); Orchard

v. Covelli, 590 F.Supp. 1548, 1559 (W.D. Pa. 1984) (“stockholders in a close corporation owe

one another substantially the same fiduciary duty in the operation of the enterprise that partners

owe to one another.”); In re Western National Corporation Shareholders Litigation, 2000 Del.

Ch. LEXIS 82, *18 (Del. Chanc. 2000)(“A shareholder will be considered a fiduciary if it owns a

majority interest in or exercises control over the business and affairs of the corporation.”

Given that Plaintiff has established a fiduciary/relationship for the purposes of Rule

12(b)(6), rescission is appropriate under Frowen v. Blank, supra, 

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b. Rescission is Appropriate Because Defendants McGann and PPI Materially

and Substantially Breached Their Contract with Plaintiff

Pennsylvania law recognizes that a material breach entitles the aggrieved party to rescind

the contract. See, e.g., Keenheel v. Commonwealth, 134 Pa. Commw. 494, 502, 579 A.2d 1358,

1362 (Pa. Commw. 1990): “Petitioner correctly points out that rescission is proper when the

complaining party has suffered a breach so material and substantial in nature that it affects the

very essence of the contract and serves to defeat the objective of the parties.”; Gray v. Gray, 671

A.2d 1166, 1172 (Pa. Super. 1996): “In 2401 Pennsylvania Avenue Corp. v. Federation of

Jewish Agencies, 319 Pa. Super. 228, 242-43, 466 A.2d 132, 139 (Pa. Super. 1983), we stated,

‘Whether a breach is so substantial as to justify an injured party’s regarding the whole

transaction as at an end “is a question of degree; and it must be answered by weighing the

consequences in the actual custom of men in the performance of contracts similar to the one that

is involved in the specific case.” 4 Corbin, Contract, §946 (1951).’” In this context,

Pennsylvania law is clear that “Materiality of the breach is a question of fact to be decided by the

trier of fact on a case-by-case basis.” Staley v. Bouril, 553 Pa. 112, 117 (Pa. 1998)

In the instant case, Mr. McGann promised to account to the Harolds for net sales and to

compensate him and his heirs based upon those sales. Mr. McGann and PPI took none of these

actions; instead, they appropriated the patent and all the royalties due thereon to use as seed

capital while they deceived the Harolds. A finder of fact could determine that these breaches

went to the heart of the contract as the Plaintiff was to receive no contractual benefit going

forward other than the payment of royalties. Accordingly, rescission is appropriately pled on

this ground.

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c. Rescission is Appropriate Because Defendants McGann and PPI Wilfully

Refused to Pay Consideration.

In cases in which the defendant has willfully refused to pay money owed to the plaintiff, 

rescission is warranted in Pennsylvania. In DiPompeo v. Preston, 385 Pa. 512, 515-16, 123 A.2d

671, 673 (1956), the Supreme Court held that:

It is to be noted in this connection that, standing alone, failure to pay money on a

designated day does not of itself justify rescission. In the case of Morrell v.

Broadbent, 291 Pa. 503, 505, this Court said: “Ordinarily, failure to pay money on

a particular day is not such material departure from the terms of a contract as to

justify a rescission by the other party, as the delay may be fully compensated by

the payment of interest; hence time is not considered as of the essence of a

contract unless there is an additional factor, such as wilful refusal to pay or

change in the circumstances or in the situation of the parties resulting in injury

from the delay, insufficient to be compensated by the mere allowance of interest. 

See also, Frankel v. Stein and Day, 470 F. Supp. 209, 213 (S.D. NY 1979), aff’d 646 F.2d 560

(2nd Cir. 1980)(rescission was warranted based upon defendant’s willful failure to pay full

amount of royalties due an artist). In this case, Plaintiff has pled a willful scheme to avoid

payment of royalties to Plaintiff, in order to use the funds due and owing as “seed capital.” Mr.

McGann paid $500 initially as part of his scheme to inspire Mr. Harold’s confidence and the to

defraud Mr. Harold and cause him to part with his valuable patent rights. Thereafter no monies

have been paid on account of net sales as required under the contract. The only payments made

were purposely mis-characterized by Defendants so as they could continue their scheme and

conceal from Plaintiff that sales exceeded $800,000 in order to use the monies owed Plaintiff as

“seed capital.” Even if this Court were to consider the payments in 2004 (never paid as royalties

on net sales) totaling $1,500.00, this amount is merely 3.44% of total royalties which Defendants

claim have been earned to dated ($43,514.00). See McGann Memorandum of Law at 6. This

amount is de minimis, and supports a finding of a wilful refusal to pay. Accordingly rescission

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has been appropriately pled on this ground.

d. Rescission is Appropriate Because Defendants McGann Fraudulently

Induced Plaintiff to Enter the HLA

Rescission is appropriate where the contract is based upon a fraudulent inducement. In

College Watercolor Group, Inc. v. William H. Newbauer, Inc., 468 Pa. 103, 115, 360 A.2d 200,

206 (1976), the Supreme Court held that:

Where a party is induced to enter into a transaction with another party that he was

under no duty to enter into by means of the latter’s fraud . . . the transaction is

voidable as against the latter 

Similarly, Section 164 of the Restatement (Second) of Contracts provides that:

If a party’s manifestation of assent is induced by either a fraudulent or a material

misrepresentation by the other party upon which the recipient is justified in

relying, the contract is voidable by the recipient. 

In this case, Plaintiff has pled that the transfer of the Patent from Robert Harold to Bryan

McGann was induced by fraud. See Complaint at paragraphs 33 and 87. As stated repeatedly

through the complaint, Defendant McGann never intended to pay the royalties as promised, but

to usurp Mr. Harold’s monopoly patent power without any intent of paying the agreed upon

consideration for same, and instead sought to use the royalty payments due and owing as “seed

capital” to build his business. Defendants nonetheless claim that the claim for rescission is not

proper upon a claim of fraud in the inducement because “the Pennsylvania Parole Evidence Rule

precludes the party requesting rescission from proving the necessary predicates to obtain this

remedy. Citing Coram Healthcare Corp. v. Aetna US Healthcare, Inc., 94 F. Supp. 2d 589, 596

(E.D. Pa. 1999) (Bartle, J.). This is not however what Judge Bartle held in Coram. Instead, as a

predicate, Judge Bartle found that in order for the Parole Evidence Rule to bar a claim for

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fraudulent inducement, the contract must be “written, unambiguous, and fully integrated.” In

this case, it is bizarre that Defendants would even claim that the Parole Evidence Rule applies

when they argue that the contract is “silent” on critical factors including the timing of royalty

payments. Moreover, Defendants further contend that the agreement is not fully written, as they

claim there was a purported oral agreement to “convert the method of payment under the

Harold/McGann Contract from a royalty on sales to a royalty on dividends for the investment of

seed capital to build and fund the business.” Accordingly, as Defendants contend the contract is

not fully written nor fully integrated, parol evidence is admissible under Coram. 

Moreover, even if the parol evidence rule were applicable, the rule only acts to bar

“evidence of fraudulent misrepresentations in the inducement made prior to the execution of ...

[a written, unambiguous and fully integrated] Agreement. 94 F. Supp. 2d at 595. Here,

however, Plaintiff alleges, inter alia, that Mr. McGann never intended to honor the promises

made in the contract. This is markedly different than the situation described in Coram, where the

fraudulent statements were made prior to the execution of the contract. Indeed, if defendants

argument were correct, fraud in the inducement could never establish a claim for rescission. 

This is clearly not the law. See College Watercolor Group, Inc. v. William H. Newbauer, Inc.,

Restatement (Second) of Contracts, §164, supra. Accordingly, Defendants argument must fail as

Mr. McGann’s fraud is an appropriate basis for rescission as well.

e. Rescission is Appropriate Because Defendants McGann and PPI Repudiate

the HLA

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In Polish American Machinery Corp. v. R.D. & D. Corp., the Third Circuit held that a

party is “entitled to rescind ... if it proves that [the other side] repudiated the agreement.” 760

F.2d 507, 511-512 (3d Cir. 1985). Here, there are sufficient facts of record to support a

repudiation of the HLA by Mr. McGann and PPI. First, Defendants admit that Mr. McGann

“convert[ed] the method of payment under the Harold/McGann Contract from a royalty on sales

to a royalty on dividends for the investment of seed capital to build and fund the business.” 

McGann Memorandum of Law at 6. Although, Defendants claim that this was done by

agreement of the parties, this contention is not accepted by Plaintiff and avoids considering the

facts pled and inferences therefrom in the light most favorable to Plaintiff.

Second, Mr. McGann repudiated the contract by transferring the Patent to PPI without

ensuring that PPI would become the responsible party under the HLA. PPI then repudiated the

contract by transferring the Patent to S&M NuTec without ensuring that S&M NuTec would

become the responsible party under the HLA. Finally, Mr. McGann and PPI repudiated the

contract by converting the Harold interest from royalty holder into that of a shareholder. These

allegations adequately support a repudiation of the contract, thereby enabling Plaintiff to rescind

same.

8. Rescission is Appropriate here where it is Defendants’ Fraud which Prevents them

from being Restored to their Prior Position

Defendants claim that Mr. McGann “could never be returned to his pre-contract position”

and therefore rescission is inappropriate. McGann Memorandum of Law at 27. In this regard,

defendants claim that: 

the product is the result of years of formulation, testing, FDA approvals,

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marketing, chemistry, veterinary cooperation and the building of a vast

distributing network, all of which was the result of McGann’s tireless efforts and

none of which involved Harold. 

Id. As a preliminary matter, these alleged “facts” are outside the record and should not be

considered by this court as there is no proof of same. Moreover, it is black letter law that where

restoration of the status quo is impossible because of the other parties’ fault, fraud, or wrongful

conduct, the impossibility of restoration “is no obstacle to the rescission of the contract.” 3

Henry Campbell Black, A Treatise on the Rescission of Contracts and Cancellation of Written

Instruments § 618 (2 Ed. 1929). In this regard, it is stated that while the general rule provides

that a party must be restored to the status quo ante in order to obtain equitable relief from the

Court by way of rescission: 

it is further necessary to consider the cause which has rendered a restoration of

the status quo impossible. If it is attributable to the party seeking to rescind, - if,

by his own act, he has disabled himself from restoring the consideration which he

has received, - he cannot maintain an action for rescission, and this rule applies

where the consideration was paid to him in cash, and he has spent it all and is

financially unable to replace it or to raise the necessary amount from other

sources, even though the money was so spent before he discovered that he had

been defrauded. On the other hand, if the party’s failure or inability to make

restitution under the contract is not his fault and not in consequence of his act, or

is because of his innocent act done before learning of the fraud, and justice can be

done without requiring such restitution, the contract may be rescinded and the

equities of the parties adjusted in the decree. And in particular, if the restoration

of the former status is prevented by the opposite party, or if it has become

impossible because of such party’s fault, fraud, or wrongful conduct, such

impossibility of restitution is no obstacle to the rescission of the contract.

Id. In this case, it is defendants’ acts and omissions which cause any inability, to the extent an

inability exists, to return to the status quo ante. Accordingly, defendants’ argument is meritless. 

9. Payment of $3,000 Is Not an Adequate Legal Remedy

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Defendants claim that rescission is inappropriate because the Harolds have under the

HLA “a legal remedy in the form of the $3,000 opt-out clause.” Again, this argument is

ridiculous. The $3,000 provision contemplated in the contract was payment in the event of an

“unforeseen delay.” This was not intended to be payment in the event defendants opted to

defraud plaintiff and willfully refuse to pay royalties so that they could grow their business. 

Accordingly, the $3,000 referenced in the contract does not provide an adequate remedy at law. 

Further, it is stated that:

the general opinion is that where a party is induced to enter into a contract by

fraud or false representations, he has an absolute right to have it rescinded, and

that though the facts may be such as would sustain a common-law action for fraud

and deceit, and though he may, if he chooses, elect to pursue that course, he

cannot be compelled to do so, and the existence of such a remedy at law is no

ground for dismissing his suit in equity.

3 Henry Campbell Black, Treatise on the Rescission of Contracts and Cancellation of Written

Instruments, § 646 (2 Ed. 1929). Moreover, it is recognized that

the fact that a penalty for non-performace is named in the contract will not operate as a

bar to a suit for rescission, where the amount of the penalty is not sufficient to give

adequate damages at law.

Id. at § 197. 

Moreover, there is no adequate remedy at law in this case, as the Plaintiff is entitled to

the return of the Patent, or at least the right to step into the shoes of PPI. Because the total

amount of PPI’s rights under its contract with S&M NuTec will not be known for years to come

as the total figure is adjustable based on net sales of products covered by the Patent, monetary

damages will not suffice, and Plaintiff must assume the PPI’s position vis-a-vis S&M NuTec. 

Moreover, even where there is an adequate remedy at law (such as payment of funds

due), rescission is appropriate where the defendant simply refuses to pay. As noted earlier, the

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Pennsylvania Supreme Court in DiPompeo v. Preston held that while mere failure to pay sums

due “on a designated day does not justify rescission ... as the delay may be compensated by

interest ... unless there is an additional factor, such as wilful refusal to pay ...” 385 Pa. at 515-

516. See also, Frankel v. Stein and Day, 470 F. Supp. 209, 213 (S.D. NY 1979), aff’d 646 F.2d

560 (2nd Cir. 1980)(rescission was warranted based upon defendant’s willful failure to pay full

amount of royalties due an artist). In this case there are sufficient allegations that Defendant

simply refused to pay, instead determined to mislead the plaintiff and his decedent and convert

the royalties for other purposes.

10. Plaintiff Provided Timely Notification of Rescission

Defendants claim there was no timely rescission because “rescission must be prompt and

in this case, approximately eight years have passed since the Harold/McGann contract was

executed.” McGann Memorandum of Law 28. Again, this argument is meritless. The

reasonable time to request rescission begins to run at the time a party has discovered facts. 

A right of action to rescind a contract for fraud, false representations, mistake, or

other cause, does not accrue until the inured party acquires knowledge of the facts

on which his claim for relief may be based. Hence accepting as established the

rule that a right of rescission must be exercised with reasonable promptness, the

time with reference to which the question of promptness must be determined is

the time when the party discovered the facts entitling him to complain, and not the

time when the contract was made, and however long he may have acted under or

acquiesced in the contract itself, he is not chargeable with laches if he acts

promptly after discovering the facts, provided, of course, that he was not

negligent or slothful in failing to discover them before. . . . This rule applies with

special force where active measures have been taken to keep the parties in

ignorance of the facts upon which a claim for rescission might be based, or where

he has repeatedly been misled by erroneous advice as to his rights and interests. 

So also where his knowledge of the facts is partial or gradually acquired . 

2 Henry Campbell Black, Treatise on the Rescission of Contracts and Cancellation of Written

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Instruments, § 538 (2 Ed. 1929). 

In this case, defendants McGann and PPI took steps to actively conceal from the plaintiff

its entitlement to royalties by repeatedly indicating that the company was making no money, or

words to that effect, yet nonetheless always promising to honor the contract. Once the Harolds

discovered this fraud in March, 2005, they promptly took action by retaining counsel and

notifying defendants McGann and Harold that the contract was rescinded and directing them to

notify S&M NuTec of same which defendants have confirmed they did. Accordingly, plaintiff

acted promptly.

11. The Gist of the Action Doctrine does not Bar Plaintiff’s Claims for Fraudulent

Misrepresentation, Constructive Fraud and Conversion 

Defendants argue that plaintiff’s tort claims for fraud, constructive fraud and conversion

are barred by the Gist of the Action Doctrine. According to defendants, the Gist of the Action

Doctrine is applicable here because they believe “the cause of action sounds properly in

contract.” In this case, however, plaintiff has rescinded the contract and as Judge Bartle noted in

Coram Healthcare Corp. v. Aetna, 94 F. Supp.2d 589, 596 (E.D. Pa. 1999), rescission is a

remedy in equity to void a contract ab initio.” Accordingly, to the extent plaintiff has adequately

pled facts to support rescission, there would be no contract left which would bar the bringing of

tort claims. This was recognized by Judge Reed in Asbury Auto Group, LLC v. Chrysler

Insurance Co. wherein he stated: 

The gist of the action test generally bars fraud claims in cases where a defendant’s

alleged failure to perform its duty under the contract is inexplicably transformed

into a claim that this failure amounts to fraud. In contrast, Asbury has alleged

that Chrysler misrepresented what Chrysler’s duties under the contract would be. 

A person defrauded into entering a contract may either rescind the contract

or affirm it and maintain an action for fraud.

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2002 U.S. Dist. LEXIS 117, *10-13 (E.D. Pa. 2002)(Emphasis supplied). Thus, the Gist of the

Action Doctrine is not a bar where rescission is permitted. Moreover, even if potentially

applicable, it is generally unwise to decide whether to apply the Gist of the Action Doctrine at

the pleading stage because “whether tort and contract claims are separate and distinct can be a

factually intensive inquiry.” CH&H Pennsylvania Properties, Inc. v. Heffernan, 2003 U.S. Dist.

LEXIS 14736, *18 n. 6 (E.D. Pa. 2003), citing Haymond v. Lundy, 2000 U.S. District LEXIS

8585, *24 (E.D. Pa. 2000). A factually intensive inquiry is generally incompatible with notice

pleading, particularly in the instant case given the lengthy and complicated background of the

dispute. 

In any event, the Gist of the Action Doctrine only prohibits the bringing of tort claims

which are merely “collateral to claims sounding in breach of contract.” The Brickman Group,

Ltd. v. CGU Insurance Co., 865 A.2d 918, 924 (Pa. Super. 2004). In this regard, the Brickman

Court found that “although mere non-performance of a contract does not constitute a fraud, it is

possible that a breach of contract gives rise to an actionable tort. To be construed as in tort,

however, the wrong ascribed to defendant must be the gist of the action, the contract being

collateral.” Id. at 927. Thus, the Superior Court noted that the trial court correctly

acknowledged that “courts have generally not applied the [gist of the action] doctrine where the

defendant not only breached the contract but also made misrepresentations about the breach to

deceive the unsuspecting plaintiff into continuing the contractual relationship or not to assert its

contractual rights against the defendant.” Id. at 928, quoting lower court opinion at 53 Pa. D. &

C.4th 71, 84 (Pa. D. & C., 2001), citing June 2000, no Greater Philadelphia Health Servs. II

Corp. v. Complete Care Servs. L.P., . 2387, slip op. at 4 (C.P. Phila. November 20, 2000)

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(Herron, J.) (citing Northeastern Power Co. v. Balcke-Durr Inc., 1999 U.S. Dist. LEXIS 13437,

1999 WL 674332 at *12 (E.D. Pa.); Polymer Dynamics Inc. v. Bayer, 2000 U.S. Dist. LEXIS

11493, 2000 WL 1146622, at *6-7 (E.D. Pa.); American Guarantee & Liability Ins. Co. v.

Fojiani, 90 F. Supp.2d 615, 623 (E.D. Pa. 2000); Fox’s Foods Inc. v. Kmart Corp., 870 F. Supp.

599, 609 (M.D. Pa. 1994)). This is exactly what has been pled in the instant case and indeed

defendants went one step further by attempting to have Mrs. Harold execute a Release so that

she could have the benefit of being “treat[ed] . . . like a shareholder.” 

Here, the actions complained of far exceed the boundaries of the contract. Plaintiff

alleges that defendants fraudulently induced Mr. Harold to sell his patent based upon the

knowingly false promise that they would pay royalties and in fact it was defendants’ plan and

design to convert those royalties to their own benefit to use as seed capital to build and grow

their business. In this regard, the Brickman court noted that Pennsylvania law “appears to permit

fraud in the inducement claims in disputes involving contractual obligations,” irrespective of the

gist of the action doctrine. Id. at 928. Moreover, the District Courts have held that claims for

fraudulent inducement are not susceptible to dismissal under the gist of the action doctrine. 

as the Pennsylvania Superior Court has recently held, the cases appear to apply

the doctrine where the claims are for fraud in the performance of the contract, but

not where the claims are for fraud in the inducement of the contract. “Fraud in the

inducement of a contract would not necessarily be covered by [the ‘gist of the

action’] doctrine because fraud to induce a person to enter into a contract is

generally collateral to (i.e., not ‘interwoven’ with) the terms of the contract

itself.”

Weber’s intentional misrepresentation claim seems to rely on its allegation that

Providence Washington used fraud to induce Weber to engage in an agreement to

keep Hansbury on light duty. Weber alleges that Providence Washington

purposefully induced Weber to avoid placing Hansbury on workers’

compensation so that Providence Washington could reduce the sum which it

would ultimately owe to Weber. While it is not clear that such alleged fraud in the

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inducement is not subject to the “gist of the action” doctrine, case law does seem

to suggest that, where the fraud is used to induce the other party to enter into the

contract, the contract is collateral to the fraud. Without Providence Washington’s

alleged misrepresentation, Weber would never have entered into an agreement to

keep Hansbury on light duty. Therefore, the fraud appears to be the gravamen of

this claim rather than the contract which occurred as a result of the alleged fraud.

Furthermore, courts have cautioned against deciding whether the gist of an action

is in contract or tort at the motion to dismiss stage of a proceeding. Often times,

without further evidence presented during discovery, the court cannot determine

whether the gist of the claim is in contract or tort. In the instant matter, it would

be inappropriate to dismiss Weber’s intentional misrepresentation claim at this

stage of the proceeding, before any discovery is conducted which could aid in a

determination of the “gist” of this claim. As such, Weber is entitled to maintain its

intentional misrepresentation claim at this time. However, Weber should be aware

of the “gist of the action” doctrine as discovery proceeds.

Weber Display & Packaging v. Providence Wash. Ins. Co., 2003 U.S. Dist. LEXIS 2187, 10-12

(E.D.Pa. 2003). Similarly, as the District Court noted in Longview Development LP v. Th Great

Atlantic & Pacific Tea Company, Inc.:

The doctrine does not provide for an absolute prohibition of tort claims when a

breach of contract is alleged. “Although mere non-performance of a contract does

not constitute fraud[,] it is possible that a breach of contract also gives rise to an

actionable tort[.] To be construed as in tort, however, the wrong ascribed to

defendant must be the gist of the action, the contract being collateral.” Id. In other

words, a party to a contract should be limited to a contract claim only when “‘the

parties’ obligations are defined by the terms of the contracts, and not by the larger

social policies embodied by the law of torts.’” Id. (quoting Bohler-Uddeholm

Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79, 104 (3d Cir. 2001)). 

Longview Dev. LP v. A&P, 2004 U.S. Dist. LEXIS 13977, *7 (E.D.Pa. July 20, 2004). Thus,

the Court found that: “fraud in the inducement is not necessarily covered by the gist of the action

doctrine because fraud to induce a person to enter a contract is generally collateral to the terms

of the contract itself and implicates society’s desire to avoid the fraudulent inducement of

contracts.” Id. at *10-11. 

Here, Longview alleges that A&P fraudulently misrepresented that its property

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for sale was unencumbered by any other agreement to which A&P was a party.

Based on this misrepresentation, Longview entered into a contract to purchase the

property only to discover that the United Food and Commercial Workers Union

had a right of first refusal on the property.

The Court finds that the gist of the action doctrine does not apply to Longview’s

allegations. According to the facts alleged in the Complaint, A&P not only failed

to perform its contractual duty to sell the property to Longview; it misrepresented

its objective ability to perform its duty by concealing the Union’s right of first

refusal, inducing Longview to enter into the contract. As explained, case law

indicates that where fraud is used to induce the other party to enter into a contract,

the contract becomes collateral to the fraud. Thus, if Longview can prove after

discovery that it entered into the contract because A&P committed [*14] fraud,

Longview’s action will be based in tort law, not contract law. Accordingly,

A&P’s motion to dismiss Longview’s fraud claim under the gist of the action

doctrine is denied without prejudice.

Id. at 13-14. Here, defendant McGann promised to account to Robert Harold for net sales of the

product. This promise, however, was made only to grab the patent, and defendant McGann

never intended to live up to his word. This conduct, as more fully described above, is beyond

the scope of any contract and is prohibited “as a matter of social policy.” Quorum Health

Resources, Inc. V. Carbon Schuylkill Community Hospital, 49 F.Supp.2d 430, 432 (E.D.Pa.

1999)(Joyner, J.). Accordingly, the gist of the action doctrine does not apply. 

Again the District Court also noted that:

Further, courts have shown a reluctance to dismiss claims for fraud in the

inducement early in the litigation. See, e.g., Little Souls, Inc. v. State Auto Mut.

Ins., Co., No. 03-5722, 2004 U.S. Dist. LEXIS 4569, at *7-8 (E.D. Pa. March 15,

2004) (allowing fraud claim to survive motion to dismiss even though the court

conceded that after discovery the gist of the action doctrine may bar the claim);

Weber Display & Packaging v. Providence Wash. Ins. Co., No. 02-7792, 2003

U.S. Dist. LEXIS 2187, at *11-12 (E.D. Pa. Feb. 10, 2003) (refusing to decide, on

a motion to dismiss, whether the fraudulent inducement claim and the breach of

contract claim were so interwoven as to bar the fraud claim).

Longview Dev. LP, 2004 U.S. Dist. LEXIS 13977 at *12-13.

With regard to plaintiff’s conversion claim, the complete failure to pay royalties to the

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plaintiff went beyond the mere contractual obligation to pay a debt. In this case, once monies for

net sales were received and calculated by defendants, it became the property of plaintiff and, as

such, represented a res to which plaintiff held title. The theft and conversion of this property by

defendants accordingly represents more than a mere breach of the contract but, in fact, a theft of

property. See Bernhardt v. Needleman, 705 A.2d 875, 878-879 (Pa. Super. 1997). As Judge

Joyner noted under analogous circumstances:

However, pursuant to the Agreement, Berger does have an interest in the fees due

and owed to it, and such an interest can allow the fees to be the subject of a

conversion. Thus, because Berger has a property interest in the settlement

proceeds, the “gist of action” test and the “economic loss” doctrine does not bar

Berger from proceeding on both a breach of contract and conversion claim.

Moreover, even if the “gist of action” test and “economic loss doctrine” were to

bar Berger from proceeding simultaneously on breach of contract and conversion

claims, Berger can still plead both claims as alternative theories of liability

against Scott. Indeed, Federal Rule of Civil Procedure 8(d)(2) states, “A party

may set forth two or more statements of a claim or defense alternatively or

hypothetically, either in one count or defense or in separate counts or defenses.

When two or more statements are made in the alternative and one of them if made

independently would be sufficient, the pleading is not made insufficient by the

insufficiency of one or more of the alternative statements. A party may also state

as many separate claims or defenses as the party has regardless of consistency and

whether based on legal, equitable, or maritime grounds.” Fed.R.Civ.P. 8(d)(2).

Therefore, as Federal Rule of Civil Procedure 8(d)(2) allows Berger to plead two

or more alternative claims against Scott for either breach of contract or

conversion, regardless of their consistency, and whether based on legal, equitable

or other grounds, Defendant’s motion to dismiss the claim for conversion must, at

this juncture, be denied. Fed.R.Civ.P. 8(d)(2).

Berger & Montague v. Scott & Scott, 153 F. Supp. 2d 750, 753-754 (E.D. Pa. 2001). 

Accordingly, the gist of the action doctrine does not apply. 

12. Plaintiff’s Tort Claims are not Barred by the Economic Loss Doctrine

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Defendants argue that plaintiff’s tort claims must be dismissed because “the economic

loss doctrine prevents plaintiffs ‘from recovering in tort economic losses to which their

entitlement flows only from contract.’” McGann Memorandum of Law at 30. Again, this

argument does not recognize plaintiff’s claim for rescission. To the extent the contract has been

rescinded and ergo is void ab initio, the former contract cannot present a bar to recovery in tort. 

Additionally, in Duquesne Light Co. v. Westinghouse Elec. Corp., the Third Circuit held

that “the economic loss doctrine . . . only covers situations in which “a party in privity of

contract with another suffers an injury to a product itself, resulting in purely economic loss.” 66

F.3d 604, 620 (3d Cir. 1995); see also Sunquest Info. Sys., Inc. v. Dean Witter Reynolds, Inc., 40

F. Supp. 2d 644, 658 (W.D.Pa. 1999)(D. Brooks Smith, J.). Moreover, the economic loss

doctrine “prohibits plaintiffs from recovering in tort economic losses to which their entitlement

flows only from a contract.” Quorum Health Resources, Inc. v. Carbon-Schuylkill Community

Hosp., Inc., 49 F. Supp. 2d 430, 432 (E.D.Pa. 1999)(Joyner, J.), citing Duquesne Light Co., 66

F.3d at 618.

In the instant case, not only has Plaintiff alleged injury to him as distinct from injury to a

product, but, as replete throughout the complaint, his entitlement to relief does not only “flow

from a contract” Additionally an exception to the doctrine arises when a “misrepresentation is

intentionally false, that is, fraudulent, the plaintiff’s fraud claim may proceed.” Based upon the

allegations of the complaint, “[a]t this stage of the proceedings . . . [this] exceptions could apply,

depending upon the factual record developed during discovery.” Sunquest Info. Sys., Inc.,40 F.

Supp. 2d at 658(D. Brooks Smith, J.). Accordingly, the Economic Loss Doctrine should not

preclude suit at this stage.

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17Defendants claim that Plaintiff cannot rely upon statement made after the contract is

executed represents a misunderstanding of the parol evidence rule. First, as noted above,

because Defendants contend that the HLA is not fully written nor fully integrated contract, parol

evidence is admissible. Moreover, the parol evidence rule only bars evidence of statements

“made prior to the execution of ... [a written, unambiguous and fully integrated] Agreement” 

Coram, 94 F. Supp. 2d at 595.

64

13. Plaintiff’s Tort Claims Are Not Barred By the Statute of Limitations

Defendants claim that “[e]ach of Plaintiff’s tort claims are ... barred by Pennsylvania’s

two-year statute of limitations which governs Plaintiff’s claims of fraud, constructive fraud and

conversion.” Moreover, Defendants claim that the discover rule is inapplicable “Because the

documents attached to the Complaint evidence McGann’s disclosure of the very same

information which Plaintiff alleges was concealed or misrepresented.” Again this argument is

meritless. First, Mr. Babbit conceded on March 28, 2005 that sales numbers had not previously

been reported: “Reporting sales was understood not to be necessary...” This is also obvious form

the correspondence and the oral communications17, where no net sale numbers were ever

reported. More importantly, Defendants continuously represented that the company was not

making money and misrepresented the basis upon which the payments were being made in 2004

so as to conceal the fact the significant net sales were being generated. Plaintiff relied upon all

of these representations to his detriment and, accordingly, should be protected by the discovery

rule.

14. Plaintiff Has Alleged Misrepresentations to Support His Fraud Claim

Defendants contend that the “letters attached to the Complaint reveal that net sales were

not concealed from Plaintiff.” This is simply not so. None of the letters reveal the net sales

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figures, and, indeed, this is probably because for some reason Mr. McGann and PPI believed that

“Reporting sales was understood not to be necessary.” Beyond this, Plaintiff rests upon the

statement of facts above. 

Next Defendants argue that Plaintiff was somehow not defrauded because the Plaintiff

“could have, at any time, opted out of the royalty arrangement and received $3,000.” While

Plaintiff is sure that Defendants would have preferred that Plaintiff exercise this option, the fact

that he did not is evidence of nothing except the continued faith the Harolds misplaced in Mr.

McGann.

Finally, Defendants claim that there could be no fraud because all royalties were

“remitted in a reasonable time.” For the reasons set forth at length above, this argument is

meritless.

15. Plaintiff’s Fraud Claims are Properly Based on Misrepresentation of Past and

Present Material Fact and Are Particularly Pled

Without any analysis, Defendants contend that Plaintiff’s fraud cause of action must fail

because “Plaintiff has failed to allege any misrepresentations whatsoever, let alone

misrepresentations relating to a past or present fact.” In this regard, they liken the instant case to

a situation in which a “licensor ... overestimated the demand for the products under the patent.” 

This, case however, does not involve mere overestimation, but rather involves an attempt to hide

the fact that products were generating significant net sales, as set forth at length above. The

allegations set forth above further establish the time frame in which the fraud took place as well

as the date of letters and conversations and give specifics as to the misrepresentations and

omissions made. Accordingly, Defendants arguments are meritless.

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16. Plaintiff Has Pled a Valid Cause of Action for Conversion

Defendants concede that a “plaintiff may bring suit ‘if he or she had ... an immediate

right to possession of the chattel at the time of conversion.’” In this case, the Harolds had an

immediate right to possession of “5% on net sales of products covered by claims of the patent.” 

Cmplt. Exh. B. As Judge Joyner noted in an analogous situation, this is a “contract for division

of work in exchange for a division of property,” i.e. the net sales of the products covered by the

patent. Berger & Montague v. Scott & Scott, 153 F. Supp. 2d 750, 753 (E.D. Pa. 2001). Thus

the Court noted that “once a fee has been received, the referral fee can be the subject of

conversion.” Id. As Judge Joyner held:

In the instant case, Berger and Scott entered an Agreement, that upon settlement

of the case, the firms would divide the 50% of total fees awarded from the clients,

according to each firm’s respective lodestar. Furthermore, both Berger and Scott

would be reimbursed for their costs. Moreover, Scott was responsible for the

collection and disbursement of the fees received from the clients. The total fees

awarded were $ 1,968,170.90, and from this amount Berger and Scott were due $

984,085.45. The $ 984,085.45 was forwarded to Scott for distribution, however,

Scott has not paid Berger its full share of the $ 984,085.45. Scott has only paid

Berger $ 315,000, which does not reflect Berger’s share of the fees due under the

Agreement.

Under Berger and Scott’s Agreement, the fees at issue are not specifically labeled

“referral fees,” as they are in Bernhardt. However, pursuant to the Agreement,

Berger does have an interest in the fees due and owed to it, and such an interest

can allow the fees to be the subject of a conversion.

153 F. Supp. 2d at 753. See also Bernhardt v. Needleman, 705 A.2d 875 (Pa. Super. 1998). In

this case, by their own admission, Mr. McGann and PPI have been collecting net sales since

2003 to which the Harold claim attaches. Accordingly, Plaintiff has sufficiently pled a claim for

conversion.

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18Defendants do make one comment which warrants a response. Defendants claim that

there was no fiduciary relationship because “If Harold believed that McGann’s decision-making

was inappropriate, he was entitled to exchange his royalty for $3,000.” This proposition, to the

extent it even affects whether a confidential relationship existed, assumes the Mr. McGann

truthfully shared his “decision-making” with the Harolds.

67

17. Plaintiff Has Pled Facts Sufficient to Establish a Fiduciary and/or Confidential

Relationship With Defendants McGann and PPI

For the reasons set forth above, Plaintiff has pled sufficient fact to establish a fiduciary

and/or confidential relationship with Mr. McGann and PPI.18

18. The Gist of the Action Doctrine Does Not Bar Plaintiff’s Claim for Breach of

Fiduciary Duty

Defendants claim that because the fiduciary relationship alleged by Plaintiff is not “wellestablished and clearly-defined by Pennsylvania law or policy,” claims based upon same are

barred by the gist of the action doctrine. The facts as stated above, however, show that the

parties’ relationship is rather typical of those that are confidential in Pennsylvania. Moreover,

contrary to Defendants’ assertion, their relationship was not entirely governed by the contract, as

Defendants McGann and PPI unilaterally decided to treat the Harolds as investors/shareholder -

a status the Harolds were not provided under the HLA. Accordingly, this argument must fail. 

Finally, as noted above, to the extent the contract is void ab initio, the gist of the action

doctrine cannot bar the claim for breach of fiduciary duty.

19. Plaintiff is Entitled to Equitable Relief

Citing the District Court’s opinion in Iversen Baking Co. v. Weston Foods, 874 F. Supp.

96, 102 (E.D. Pa. 1995) as “instructive,” Defendants claim that all counts for equitable relief

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68

must be dismissed. Iverson, however is rather limited, and merely states the generally accepted

principle that:

Plaintiffs have pleaded promissory estoppel alternatively to their breach of

contract claims (Counts I and II). They and Defendants agree that in

Pennsylvania, a promissory estoppel claim can only exist in the absence of a

contract. Courts have held that breach of contract and promissory estoppel may be

pleaded in the alternative, but that if the court finds that a contract exists, the

promissory estoppel claim must fall.

874 F. Supp. at 102. Plaintiff has followed the same path in this case alleging breach of contract

and unjust enrichment as alternatives. Moreover, as discussed above, the tort counts in this case

arise from the extra-contractual conduct of the defendants and their confidential/fiduciary/trust

relationships with the plaintiff. A such, Defendants tortious conduct is not subsumed solely

within the confines of a breach of contract claim.

20. Plaintiff’s Unjust Enrichment Count Is Legally Sufficient

Defendants concede that unjust enrichment is appropriate where there is no contract. 

Accordingly, to the extent this court finds that rescission is appropriate, then unjust enrichment

would lie as there no longer exists a contract.

21. Plaintiff is Entitled to a Legal Accounting

Defendants argue that there can be no legal accounting because there is no valid claim for

breach of contract. For the reasons set forth above, Plaintiff has adequately pled a claim for

breach of contract. Accordingly, an accounting is appropriate.

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22. Plaintiff is Entitled to an Equitable Accounting

Defendants claim that an equitable accounting is improper because there is no evidence

of a fraud, misrepresentation or breach of fiduciary duty. For the reasons set forth above,

Plaintiff has adequately pled those claims. Moreover, in the event this Court finds that rescission

is appropriate, Plaintiff will need to invoke its equitable powers to order an accounting as there is

no longer a contract at law. 

23. Plaintiff Has a Proper Claim for Restitution

Defendants concede that restitution is appropriate where there is no contract. 

Accordingly, to the extent this court finds that rescission is appropriate, then restitution would lie

as there no longer exists a contract.

24. Plaintiff is Entitled to Restitution under the Restatement (First) Restitution, §128

Defendants claim that restitution is inappropriate under Section 128 because “Plaintiff

cannot maintain a claim for conversion or any other tort.” For the reasons set forth above, this

claim is meritless.

25. Plaintiff is Entitled to Restitution Pursuant to Restatement (First) of 

Restitution § 130

Defendants claim that restitution is inappropriate under Section 130 because “Plaintiff

has not alleged a sustainable tort upon which to base this claim.” As alleged throughout,

Defendants obtained both the Patent and the royalty monies owed the Harolds through tortious

means. Accordingly, for the reasons set forth above, this claim is meritless.

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26. Plaintiff is Entitled to Restitution Pursuant to Restatement (First) of 

Restitution § 138

Defendants claim that restitution is inappropriate under Section 138 because “Plaintiff

cannot properly allege a fiduciary relationship existed between Harold and Defendants.” For

the reasons set forth above, this claim is meritless.

27. Plaintiff is Entitled to Restitution Pursuant to Restatement (First) of 

Restitution § 190

Defendants claim that a claim for breach of trust/trustee ex malificio is inappropriate

under Section 138 because “no fiduciary relationship existed between Harold and Defendants.” 

For the reasons set forth above, this claim must fail.

28. Plaintiff has Pled Sufficient Facts to Establish that S&M NuTec is Not a Bona Fide

Purchaser for Value

As the District Court found in Millenium Enterprises v. Tobias Knoblauch Private Bank,

“The person claiming to be a bona fide purchaser bears the burden of proof” and “requires a factspecific inquiry by the court.” Millenium Enterprises v. Tobias Knoblauch Private Bank, 1991

U.S. Dist. LEXIS 12275 (E.D. Pa. 1991). In this case, S&M has not, and cannot at this stage

before discovery, establish that it was not on inquiry notice of Plaintiff’s claim. 

Inquiry notice is not entirely distinct from actual or constructive notice; rather, it

is a duty of a purchaser to conduct a reasonable investigation upon gaining

constructive or actual notice of facts which would make a prudent person

suspicious. The doctrine is moored upon the existence of preliminary facts which

serve to put the purchaser upon inquiry.

In re Ryan, 851 F.2d 502, 511 (1st Cir. 1988). Similary, in McAteer v. McMullen, 2 Pa. 32, 33-

34 (1845), the Pennsylvania Supreme Court held:

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The court instructed the jury that Neen was not a bona fide purchaser without

notice, because the testator, in the will under which he of course must claim,

devised to his son Robert fifty acres of the north-west corner of the tract, that

being the part which last answer the description in the will, unless it had been

selected elsewhere and never given up. That any person on reading the will would

be led to inquire whether Robert Mullen had got his fifty acres, and where, and

whatever would put him on inquiry would be notice. This is a correct application

of an acknowledged elementary principle, and consequently effects the purchaser

with constructive notice.

Here, Plaintiff has alleged that:

Upon information and belief, S&M NuTec knew, or should have known, through

the exercise of appropriate due diligence in the context of the negotiation and

execution of the transaction documents believed to have been executed on or

about March 7, 2005, that Defendants McGann and PPI had abused their

relationship with Plaintiff and were in material breach of the Sale Agreement.

Cmplt. ¶67. In this regard, as discussed above, S&M NuTec was provided with “open” access to

PPI’s books and records and was permitted to utilize due diligence. Had S&M carefully

reviewed the books and records of PPI, it would have been well aware that neither PPI nor

McGann had paid any royalties on account of net sales and that there was no provision in the

HLA to convert the Harold interest to an equity interest or a right to collect royalties based upon

payment of dividends. The fact alone that no payments were made on account of net sales should

have put S&M on at least inquiry notice that PPI and McGann were in material breach of the

HLA. 

Moreover, Pennsylvania law is clear that assuming one is an innocent purchaser, he or

she is only fully protected from latter claims if the full consideration has been paid.

To protect a purchaser, by the English rule there must be execution and payment

of the entire purchase, for there is no protection for partial payments; by our own,

as it was held in Youst v. Martin, 3 Serg. & Rawle 423, 430, it is otherwise. If

then it turn out that the plaintiff had paid the whole purchase-money when notice

was received, she will be protected for the whole: if she had paid a part, she will

be protected for so much, just as if it had been paid by the vendor to the ground

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tenant, and a proportionate abatement of the rent will be made for the residue: if

she had paid nothing, she will be protected for nothing.

Juvenal v. Jackson, 14 Pa. 519, 524 (Pa. 1850). In this case, far less than half the consideration

has been paid by S&M, it cannot be a bona fide for the full value of the transaction. Cmplt Exh.

H.

29. Plaintiff has Pled an Appropriate Action for Declaratory Relief

Defendants argument concerning declaratory relief ignores the fact that Plaintiff has pled

a valid claim for rescission. In this regard, it is black letter law that:

if a third person takes property with knowledge that it was procured by his grantor

from the original owner by fraud, false representations, duress, etc., or if he

knows facts sufficient to put a man of ordinary business prudence on inquiry,

which would lead to such knowledge, then he cannot claim protection of a bona

fide purchaser, and the transfer to him is no obstacle to a rescission or

cancellation at the instance of such original owner.

3 Edward Campbell Black, Treatise on the Rescission of Contracts and Cancellation of Written

Instruments §640 (2nd Ed. 1929). Here, as discussed above, S&M certainly had more than

enough facts available to it to know that Plaintiff had a valid claim for rescission against PPI and

McGann by virtue of their fraud, breach of fiduciary duty, willfull refusal to pay consideration,

material and substantial breach and repudiation. Accordingly, Defendants argument must fail.

30. Plaintiff is Entitled to Pursue an Equitable Lien

An equitable lien is imposed to protect against and disgorge any unjust enrichment. HCB

Contrs. v. Rouse & Assocs., 1992 U.S. Dist. LEXIS 9916 , *30 (E.D. Pa 1992). In this regard, it

is “a remedial device to protect a party against some inequitable loss.” Id. at *28. As Defendants

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73

already conceded, unjust enrichment is permissible in the event this Court finds there is no

contract. Accordingly, because Plaintiff has plead sufficient facts to warrant rescission, an

equitable lien is appropriate.

31. Plaintiff is Entitled To Equitable Rescission

Whether a remedy or a direct cause action, for the reasons set forth above, Plaintiff is

entitled to rescission.

27. Plaintiff has Properly Requested a Constructive Trust Be Imposed

Plaintiff recognizes that a constructive trust is a remedy imposed by the Court, and only

pleads it as a remedy for breach of trust, which as delineated above is manifest. In this regard,

Plaintiff has appropriately pled acts of fraud or other wrongful conduct. Moreover, as Judge

Padova noted in HCB Contrs. v. Rouse & Assocs., 1992 U.S. Dist. LEXIS 9916 (E.D. Pa. 1992):

“Where a person holding title to property is subject to an equitable duty to convey

it to another on the ground that he would be unjustly enriched if he were

permitted to retain it, a constructive trust arises.” Restatement of Restitution § 160

(1937).

The Court further noted:

The equation changes slightly, however, when the property upon which an

equitable "mortgage" or an equitable "lien" hangs is disposed. In that instance, a

constructive trust may be imposed upon the product of the disposition to prevent

unjust enrichment. See Pierro, 438 Pa. at 127, 264 A.2d at 696 (A constructive

trust will be imposed when "'legal title to property is obtained by a person in

violation, express or implied, of some duty owed to one who is equitably

entitled.'" (quoting Equity Jurisprudence § 1044)); Zvonik v. Zvonik, 291 Pa.

Super. 309, 318-19, 435 A.2d 1236, 1241 (1981)(To prevent unjust enrichment, a

constructive trust may be imposed even if property is not obtained in violation of

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some duty.); Restatement of Restitution §§ 202-206. Following [*39] the res

analysis, the reason for this is that an identifiable res, the proceeds from the

disposition, evolves from the transaction.

HCB Contrs. v. Rouse & Assocs., 1992 U.S. Dist. LEXIS 9916 (E.D. Pa. 1992). Here, both PPI

and McGann, would be unjustly enriched if they were permitted to retain the benefits of the

Harold Patent for all the reasons stated above. Accordingly, a constructive trust is appropriate.

NEIL E. JOKELSON & ASSOCIATES, P.C.

_____________________________NEJ 2239

NEIL E. JOKELSON, ESQUIRE

DAVID E. JOKELSON, ESQUIRE, 

DEREK E. JOKELSON, ESQUIRE, 

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